Last month I started a discussion about how to protect our assets so we actually have something to pass to our heirs upon our death. I mainly talked about how the government tries to reduce our estate by way of taxes. This month the discussion moves to the cost of long term care, and how to minimize that cost.
As previously stated, the cost of care in New York can run anywhere from $6,000 per month for home care to over $15,000 per month for nursing home care. That’s a lot of money to go through! Doing the math, that’s over $180,000 per year. With the average stay in a facility being two and a half years, the cost could climb to a half a million dollars when all is said and done.
So how do we stop that from happening? Keep in mind that the government has a very simple way of looking at this. If you have assets and need care, you need to spend your assets first. When you run out, then the government will take over in the form of Medicaid. In New York, “running out” means having less than $14,500 to your name. That includes savings, checking, money market, cds, stocks, bonds, brokerage accounts, etc. It even includes the cash value in any life insurance and (with some exceptions) your home. Basically, if it’s got your name on it, you need to spend it first.
That means that in order to protect some assets, we need to get them out of your name. This now becomes a balancing act of which assets and how much. And, more importantly, to whom do we give those assets? I have found over the years that this becomes a very personal decision and depends on the comfort level of the individual. Some people feel that they need very little while others like to have much more around “just in case.” It also depends on your income and how much of the assets are needed to live.
Just be aware (without going into all the rules and regulations of Medicaid) that the transfer of assets will cause a period of ineligibility for Medicaid for up to five years. This penalty begins when you first need the medical assistance, so if you do make a transfer you need to be able and willing to wait 60 months before you can apply for the government assistance.
Getting back to what assets to transfer, in most cases the easiest answer is to move the house. This is usually the single most valuable asset. When I first started doing this back in the ‘90s, this meant simply doing a deed transferring the property to the kids.
Between changes to the laws over the years and us attorneys getting smarter, this is probably no longer the way to go. First, there are multiple tax issues. Since the kids own the house but don’t live there, they will pay a very large capital gain tax when the house is sold. It doesn’t matter whether it’s before or after your death. There’s also the loss of all your STAR exemptions.
Second, and I think the bigger problem, is the fact that your children now own your house! Hopefully they’re not the kind of kids that would then throw you out, but legally they could. Or relegate you to living in the basement. More to the point, what happens to your house if something happens to one of your kids? What if your daughter begins having creditor problems, or gets involved in a car accident and is being sued? What happens to your house if she decides to get divorced? Like it or not, your house gets thrown into the mix.
Or worse, what happens if your son dies before you? Now, according to his estate plan, your daughter-in-law owns your house; or your grandchildren own it – probably not what you were expecting to happen at this time of your life.
To avoid some of these unforeseen consequences, when transferring the property, you could retain a Life Estate. This would at least give you the legal right to live in the house exclusive of anybody else. It would also allow you to keep your STAR exemptions. If the property wasn’t sold until after you died, the Life Estate also eliminates the capital gain tax issue. If it was sold before that, there would still be a large tax problem, but not quite as bad. But, the biggest problem (in my eyes) is that your children would still own your house and it would still be subject to their ills and wills.
One solution? An irrevocable trust for Medicaid qualifying purposes. I have to specify it that way because there are all sorts of irrevocable trusts. Many of them are for tax purposes or for insurance purposes. These do not always help in terms of protecting your house (or any other asset you may put into the trust) from the cost of long term care.
This trust can be tailor made to fit the individual needs of the client. Done correctly, it will provide a life estate for you allowing you all of your tax benefits. More importantly, the trust “owns” your house or any other asset you may put into the trust. Your children won’t own it until after you die. I could spend another hour talking about this trust, but for more details, you should speak to a qualified Elder Law attorney.