Do Nothing vs. Long Term Care Insurance vs. Gifts vs. Irrevocable Trust–Part 3
July 1, 2015
This edition of the Koldin Report E-Newsletter is Part 3 in a series comparing the pros and cons of (1) Doing Nothing (2) Purchasing Long Term Care Insurance (3) making gifts to your children, and (4) transferring your savings and family home to an Irrevocable Family Trust (also sometimes referred to as Irrevocable Medicaid Trust). The previous newsletters can be found on our website by clicking here .
If you need long term care in a Nursing Home or at Home, which in Upstate New York costs around $10,000 per month, there are 3 ways to pay for it:
(1) Pay for your care with your life savings
(2) Pay for your care with Long Term Care Insurance
(3) Pay for your care with Medicaid
In planning for how you are going to pay for Nursing Home or Home Care if you someday need these services, you have 4 basic choices:
(1) Do Nothing
(2) Purchase Long Term Care Insurance
(3) Make Gifts to your Children
(4) Transfer to an Irrevocable Trust
In the previous newsletters in this series, we reviewed the options of doing nothing or purchasing long term care insurance. In this newsletter we review the pros and cons of making gifts to your children.
Making Gifts to Your Children
If 5 years goes by from the date you transfer your savings and property to your children, the Medicaid Agency will not penalize those gifts. You will be treated as though you never owned those assets and they will be protected from being lost towards the cost of Nursing Home Care.
If you do not make it by this 5 year lookback period and you need Nursing Home Care, then your children will either have to return those funds to you or there will be a transfer penalty period imposed before you will become eligible for Medicaid.
The advantages of making gifts to your children are that it is easy to do and does not cost anything except legal fees for preparing a deed if you are transferring your home or other real property.
There are many disadvantages to giving away your life savings to your children. Some examples are:
- Transferring to your child could make you uncomfortable and feel like you have lost control
- Gift tax consequences of transfers
- Transfers can increase your child’s income tax liability
- Transferring assets could affect your grandchildren’s financial aid for college
- Child could get divorced and your savings could be subject to claims by the child’s spouse
- Child could file for bankruptcy and your savings could be subject to child’s creditors
- Child could be sued and your assets could be lost to the person suing your child
- Child dies before you and your savings could pass to someone else in your child’s will
- Child could become ill and need long-term care and your life savings might have to be spent on your child’s Nursing Home bills.
- There are also advantages and disadvantages to transferring your family home to your child (or children) while retaining a life estate to yourself:
- Your children would receive a stepped-up basis date of death value of the home if they sell the home after your death.
- A gift tax return may need to be filed depending on the value of the home.
- It is possible that a portion of the $250,000 family home exemption ($500,000 for husband and wife) can be preserved based on the value of the life estate.
- You would still receive certain Tax exemptions such as STAR and Veterans.
- A life estate prevents your children from being able to sell your residence until your death unless you sign the deed (Note: Your Power of Attorney might be able to sign the deed on your behalf).
- Once the five year lookback period has elapsed, your property would not be counted for Medicaid eligibility purposes.
- If a Medicaid recipient owns a life estate to real property, the net income earned by the property (rent), will have to be paid to the nursing home.
- If the property, including the life estate is sold, the life estate portion of the proceeds of sale might need to be applied towards the cost of care.
- When you transfer your home to your children or other family members this option legally transfers ownership to your children. They now own the house and if problems arise in your children’s lives, the house becomes subject to their problems, such as death, divorce or creditors.
- If you later want to sell your house, your children do not have to agree to sell.
- If you later have a dispute with your children, they do not have to return ownership of the house to you and you cannot disinherit them from this ownership.
Many of the disadvantages outlined above can be avoided if you transfer your home and some of your life savings to a specially designed Irrevocable Trust. The next newsletter in this series will review the advantages and disadvantages of setting up an Irrevocable Medicaid Trust.
At the Koldin Law Center, P.C., with offices in Syracuse , New York, we have over 50 years of experience helping individuals plan for immediate crisis and long term care. Our attorneys are available to discuss your estate planning options. We do not charge a fee for the initial consultation. At that appointment, we will review with you all of these options: (1) Doing Nothing (2) Purchasing Long Term Care Insurance (3) making gifts to your children, and (4) transferring your savings and family home to an Irrevocable Family Trust. We welcome your children, family attorney, accountant, and/or financial planner to be present at the initial consultation.
There is something you can do.