A few years ago, I heard a commercial on the radio exhorting people to use a Realtor to buy or sell their house. The commercial’s reasoning was that Realtors have a higher level of training and education. The commercial talked about how your house is often your most valuable asset, and that a Realtor could help you in protecting your house. Mostly, I think the commercial was about how to maximize the amount you get from selling your house, or, if you are buying a house, how to pay as little as possible. The commercial also touched on the concept that a Realtor has experience in buying or selling a house, so the Realtor knew what common problems might come up in buying or selling a house.
I understand that commercial much more as an adult than I did as a teenager. The Realtor can help someone protect their investment in a house by avoiding common problems, and getting the best deal for their client, which makes sense.
I also see how I can help people to protect their house as an attorney. Protecting a house from a legal perspective is different than the work a Realtor does, as different concerns are involved. Just like a Realtor will protect you from problems related to the sale or purchase of a house, legal protections for a house should be handled by someone who knows what they are doing.
Protect Your House From Long Term Medical Costs
Oftentimes, the people I meet with people who want to protect their house from the nursing home taking the house, or from the government taking the home. Most of these people are concerned about the cost of paying for long term care. They want to take steps to protect their home.
This blog post discusses legally protecting your home. Protecting the home is possible, but such asset protection requires planning for the proper time frame, and planning for the future.
You need to understand how an asset protective structure works. You also need to consider the tax consequences of what you want to do. And lastly, you want to start your asset protection planning before a crisis hits to maximize your savings. I can help with these things.
Timing is Important – Start with Knowing the Rules to Protect Your House
Because long term medical care costs can become quite expensive (upwards of $100,000 per year, depending on the level of care needed), you want to be aware of the legal rules on protecting a house. Medicaid is the biggest government program that will pay for long term medical care, but Medicaid has some strict asset and income requirements – $2,000 or less in countable assets, and, in general, income that is less than the cost of medical care. For Medicaid purposes, the house is considered an exempt asset, which means Medicaid will not take the house from you while you are alive – if you plan to return home – even if Medicaid is paying for your care. This is also true for your spouse – Medicaid will not come and take the house if your surviving spouse lives in the house after you have passed away – even if Medicaid paid for the deceased spouse’s care. However, when the surviving spouse passes away, then Medicaid will want to collect the amount paid out for care from any equity in the house. Therefore, a house being an exempt asset is only true while you are alive, and not after you have passed away.
You should also consider if you need to move out of the house to receive long term care at an assisted living community, or skilled nursing facility, or some other similar type of arrangement, and you sell your house to pay for the long term care, the proceeds from the sale of the house are not exempt, so those funds will need to be used to pay for the long term care.
If you have been on Medicaid, and you get money from selling a house, then you may be kicked off Medicaid and need to pay back what you received. This is true of Medicaid and other long term care funding programs, like the VA Aid and Attendance benefit. So, if you can, it may be a better approach to plan ahead to protect your house.
The 5 Year Rule
If you want to remove your house from the consideration of available assets for Medicaid or other purposes, you need to be aware that you need to get the house out of your name more than 5 years before you apply for Medicaid. Medicaid has a 5 year look back period, which means if you give your house away for less than fair market value in return, Medicaid can take the value of your house given away and deem you ineligible for assistance for a time period. This time period may be longer than if you had just used the money from selling a house, as the number that Medicaid uses as the standard monthly cost may be less than what you actually pay. There are exceptions to the 5 year rule, such as a shortened time frame if a family member stays in the house to care for you, but the 5 year rule is the starting point. If you can transfer your house out of your name more than 5 years before you need long term care, that is the best case scenario.
Watch Out for Taxes – Plan Ahead to Minimize the Tax Impact
To whom you transfer the house is important. Many people just want to give their house to their kids. This works, if you do so more than 5 years in advance, but there may be some negative tax consequences. If you give a house to your kids, your kids will take the house with what is called, carryover basis. Basis is important in calculating tax due on the sale of a house. When you sell a house, you pay tax on the gain, the increase in value of the house from when you bought it until when you sell it. In other words, you are taxed on the difference between the sales price and the cost-basis: what you paid for the house, plus improvements, if any.
For example, If you were to give your kids a house worth $300,000, and you paid $50,000 for the house, then your kids would need to pay tax on the $250,000 if increased value – which would likely be 20% under current laws, or $50,000 in tax. If you had sold the house, you could have excluded $250,000 of gain, so you would owe no tax. Or, if you were to pass the house onto your children when you die, the children would inherit the house with what is called a stepped-up basis: the fair market value of the house when you die. In that case, if the kids inherited a house worth $300,000 and sold the house for $300,000, then the gain would be $0 and no tax would be due. Of course, if you personally own a house when you die, then it is probably not protected from claims by long term care providers, or Medicaid.
To protect a house but still preserve the way to pay the least amount of tax you need to plan ahead.
Because of the tax implications of just giving the house to your kids, that may not be the best plan. Instead, you can create an asset protection trust to protect the house, while still preserving the desirable tax attributes. Such asset protection trusts involve quite a few sets of rules, including Medicaid, IRS tax code, and Colorado state law. You probably don’t want to try to set something like that up on your own, as there are many ways to make a mistake.
Setting Up an Asset Protection Trust Requires Careful Planning and Specialized Skills
Asset protection trusts for your house are tricky and need to be done the right way. I cannot explain all of the ways an asset protection trust may not work in a blog…it takes more time and a more in depth discussion. I can have that discussion, but prefer to do so on an individual basis.
The short answer is that you need to be separated enough from the assets that they are not available to you, and the separation needs to be accomplished within the allowable methods under Medicaid, IRS, and Colorado state laws.
I have seen people who put themselves as a Trustee for an asset protection trust, which can be a problem, but just solving that problem does not ensure the asset protection trust will work. That is one of many problems that may come up, so you are much better served to work with an estate planning attorney experienced in these methods of asset protection planning. I do a lot of advanced asset protection planning, so I can help you protect your house, or your other assets, to the fullest extent allowed by the law.
Let’s Plan Together to Protect Your House
Of course if you end up in a crisis there are different options available to help you get your asset protected, but they are limited, and less assets can be protected. I tend to work on the advanced asset planning side of things, which allows you to protect your house and assets better. But, if you are in a crisis situation, I can also work with you to protect assets as far as possible. If you want to protect your assets, please contact me to set up an appointment. Together, we can legally protect your house!