As we age, most of us will find the costs of long term care unaffordable. The current average cost of a semi-private room in a nursing home in Connecticut is over $12,000 per month. This charge can quickly wipe out even a large estate, depending on the length of the resident’s stay. Fortunately, Medicaid is available to pay these costs if you qualify for assistance.
Estate Recovery
When you die, the state will attempt to recover from your estate any Medicaid benefits paid on your behalf. One of the ways the state uses to recover the benefits paid is by recording a lien against the decedent’s home in the land records of the town where the property is located. The state can lien the property as long as no other person receiving Medicaid benefits is living in the home. This process is known as “estate recovery.” For the majority of Medicaid recipients, the house is the only asset remaining on which the state can recover Medicaid payments. If the Medicaid payments exceed the value of the house, your family may not inherit anything from you.
The best way to protect your house from the Medicaid lien upon death is to transfer it to an Irrevocable Grantor Trust.
Irrevocable Grantor Trusts for the Home
A trust is an arrangement where a Trustee holds the property for family members. The Trustee’s job is to administer the assets of the person who set up the trust (i.e. - the parent) and ultimately to disburse the assets to the beneficiaries of the trust (i.e. -- the children). The parent retains no interest in the Trust. In an Irrevocable Grantor Trust, one or more of your children manage the property as Trustee. The Trust is not recorded on the land records of any town. You continue to live in your home and pay all of the expenses of the property including real estate taxes and insurance.
If you have to sell the home to go to an assisted living facility or nursing home, the grantor trust provisions allow you to use your entire $250,000 capital gain exclusion to shelter the gain in value from income taxation. Contrast that result with transferring the house to your children and retaining a life estate. With a life estate, the $250,000 capital gain exclusion for the sale of a home will only apply to the life tenant’s portion of the net sale proceeds. The children will have to pay thousands of dollars in income tax on the difference between the cost basis of the property and the sales price multiplied by their percentage interest.
If the house has to be sold, the Irrevocable Grantor Trust also has an advantage over the life estate from the creditor standpoint. The property stays in the trust and the creditors of any child cannot reach it because the proceeds are held by the Trustee and not the child/beneficiary. Because the sale proceeds remain in the trust, the family does not have to scramble to spend sale proceeds within the month of receipt so that the parent can remain on Medicaid.
Once you convey your house to the Irrevocable Grantor Trust, you no longer own the property. If the conveyance occurred more than 5 years before applying for Medicaid, the State of Connecticut cannot put a lien on it. The Trustee can sell the property and distribute the net sale proceeds to your children without having to pay the state. Nevertheless, because you no longer own the house you conveyed to the Irrevocable Grantor Trust, you can’t refinance the house and there is no possibility of increasing your income through a reverse mortgage.
The attorneys at our law firm also include a special power of appointment in the Irrevocable Grantor Trust so that you retain the power to change the disposition of your home among your descendants. If one of your children goes through a messy divorce, an unforeseen bankruptcy, needs public benefits, or you have a falling out with a child, the trust protects your home.
The grantor trust provisions in the Trust allow the step up in basis of your home at your death to its fair market value . When your children sell the home, they will pay little or no income taxes on the sale because of the stepped up basis. In this respect, the Irrevocable Grantor Trust is just like the life estate.
Plan Ahead!
Don’t wait until it is too late. A transfer to an Irrevocable Grantor Trust only works if you do not apply for Medicaid for 5 years after the transfer of property into the Trust. Contact an estate planning attorney to find out how you can protect your home from Medicaid recovery with an Irrevocable Grantor Trust.
