Many attorneys provide some kind of elder law or Medicaid planning for their clients, but often the income and estate tax ramifications are glossed over. In fact, any transfer of assets to protect them from nursing home expenses should be done with a thorough discussion of the potential tax impact.
Some attorneys recommend their clients transfer ownership of their home to their children and retain a “life estate”—a way to retain ownership of land for the duration of someone’s life—as a way to ensure the clients have the right to remain in their home. While the goal is to start the five year look-back period for Medicaid, this technique can have some adverse effects on the family.
- If someone sued any of the children as part of a divorce proceeding or due to a bankruptcy or lawsuit, the court could force the home to be sold and require the elder to move. The elder receives only a small percentage of the proceeds of the sale as their share from the life estate.
- If the home were sold during the elder’s life, the children would likely incur a capital gains tax, as they would receive the majority of the proceeds. If the basis (or the initial cost of the home) was low, the capital gains taxes could be significant. In many cases, this is an unpleasant surprise for the children.
- Transferring ownership of the house often means that the elder no longer has full control over whether the home is sold.
Experienced elder law attorneys with a full understanding of the implications of Medicaid planning often recommend an irrevocable trust, or what we at Family Estate Planning Law Group call a “lockbox” trust. This can potentially increase the control the elder has over the home, reduce any capital gains tax when the home is sold and protect the home from being sold to satisfy a child's divorce, bankruptcy or lawsuit.
Proper Medicaid planning must take into account the tax implications. Any solid planning done by a qualified attorney will ensure that assets are protected and taxes are minimized. This is a very complex area of the law, so you should speak with an experienced elder law attorney.
For more information on the importance of Medicaid planning, visit our website and contact us to schedule your consultation today!