For many people, their house is their most valuable asset. Our new clients always ask, “How do I save my house from being lost to nursing home costs?” The answer in many situations is through the use of an asset protection trust designed for Medicaid purposes.
Assets placed into an asset protection trust are not required to be spent down to qualify for Medicaid benefits, nor are they subject to Medicaid estate recovery after death. Once you are past the state’s five year look-back, there will be no penalty if you apply for Medicaid.
Other alternatives lack the advantages of a trust. Here is one of the most common alternatives clients often suggest, not realizing the risk:
Q: Why don’t I just give my house to my son? He will let me live there for the rest of my life. After five years, I will not have any problem with the look-back period.
A: It’s possible this plan could work the way you imagine – if nothing bad happens. You could apply for Medicaid penalty-free after five years, and the house would pass to your son in its entirety.
But your plan will fail if something bad happens. Your son could die, and if he was married, the house could then be owned by his wife. Do want this? Your son could get divorced and lose the house to a hostile ex-wife. If your son owns the house, then the house is now subject to your son’s creditors. What if your son declares bankruptcy or doesn’t pay his income taxes? These are just a few of the possibilities. You might ask “What are the chances of any of these things happening?” Well, you have homeowner’s insurance to cover the cost of rebuilding your home if it’s destroyed by a fire. What are the chances that your house will be destroyed by a fire?
Even if none of those things happen, you still have another problem – capital gains taxes. Your son will probably face higher capital gains taxes from receiving the house by gift than he would if he inherited it from you directly or through a grantor-type trust.
On the other hand, if you place the house into a trust, you can have safeguards built into the trust that would protect you if something bad happened to any of your beneficiaries. You could enjoy favorable capital gains tax treatment. If your health failed in the next five years, a trust could give you greater options for protecting the house than you would have if you simply gave the house away.
To learn how you can save your house with an asset protection trust, please contact us for a free consultation.