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Protecting Your Home: The Risks of Gifting to Your Children

Due to strict Medicaid eligibility rules, you may be nervous about losing your home should you need to enter a nursing home and apply for Medicaid.  Without guidance, many have the idea to transfer their home to their children.  However, this is usually not the best way to protect it.

Although you do not have to sell your primary residence to qualify for Medicaid coverage of nursing home care, the state could file a claim against your house after you die to recoup the amount they laid out for your care.  This process is called “estate recovery.”

In the efforts to protect your home against this recovery, you may be tempted to change the deed to put your home in your children’s names.  Below we have outlined why that may not be the best plan:

Loss of control.

By transferring your house out of your name, you will no longer own the house, your children will.  This means you will no longer have control over it and your children may do whatever they please with it.  In addition, should your children be involved in a divorce or lawsuit, the house will be counted as their asset and will be vulnerable to creditors.

Medicaid ineligibility.

Making a transfer of assets, including the transfer of your home within Medicaid’s 60-month look-back period may make you ineligible for Medicaid for a period of time. If you made a transfer for less than market value within the 5 years, the state will impose a penalty period during which you will not be eligible to receive benefits. Depending on the value of the house, this penalty could stretch for years causing the applicant to spend down almost all their money.

There are a few circumstances in which a transfer of a home does not cause a penalty, however, it is important to consult with a qualified elder law attorney prior to making any transfers.  You may freely transfer your home to the following individuals without incurring a transfer penalty:

  • Your spouse.
  • A child who is blind, disabled, or under the age of 21.
  • Into a trust for the sole benefit of a disabled individual under the age of 65.
  • A “caretaker child” who has lived with their parent for a minimum of two years prior to them moving into a nursing home and who during that period provided care that allowed the applicant to remain at home and avoid a nursing home stay.
  • A sibling who holds equity interest in the home and has lived in the home during the year preceding the applicant’s institutionalization.

Adverse tax consequences.

After you die, when your property is inherited, it receives a “step up” in basis.  This means the basis is the current value of the property.  However, when you give property to a child in your lifetime, the tax basis for the property is the same price that you purchased the property for.

Once you die, if your child chooses to sell the house, he or she will have to pay capital gains taxes on the difference between the tax basis and the selling price.  The only way to avoid a portion or all of the tax is for the child to live in the house two years prior to them selling the house.  If they do, the child can exclude up to $250,000 for an individual or $500,000 for a couple of capital gains from taxes.

There are many planning tools that can be used to protect your home from Medicaid estate recovery, including putting the home in a trust.  To discuss the best option for your situation, consult with an experienced elder law attorney.

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