I recently conducted a webinar surveying the various techniques clients can take to protect their home from the costs of long-term care. These ranged from standing pat and doing nothing to giving their home to their kids, with life estates, irrevocable trusts, and purchasing long-term care insurance as in-between strategies, each with its own pros and cons.
Afterwards, I received a number of follow-up questions. Here are some of them with my answers:
What is the best option for an unmarried homeowner with no siblings or disabled children?
For someone who only needs to protect his property for himself, the most important step that I would recommend is to file a homestead declaration to make sure that the first $500,000 of equity is protected in the event of a lawsuit or bankruptcy. You might also consider placing the property in a revocable trust in order to avoid probate and to appoint a successor trustee to manage the property in case you become incapacitated. But there's no reason to take any of the other steps we discussed because they all involve a cost or some loss of control or access—a tradeoff that probably does not make sense if you are not protecting the property for a family member.
Are the benefits and disadvantages the same for revocable trusts as irrevocable trusts?
A revocable trust provides no MassHealth protection. As I mentioned above, it has other estate planning benefits, but if you have a house in a revocable trust and have to apply for MassHealth you will be forced to remove the house from the trust in order to get benefits, making it subject to estate recovery.
If you put home in an irrevocable trust, isn't that an immediate gift to the beneficiaries with carryover basis? How do you get the step-up?
We always include a limited testamentary power of appointment in the trust, which permits the grantor to redirect who gets the house or other trust assets when they die. For tax purposes, this results in the trust property being in the grantor's taxable estate when he dies and as a result, the heirs get a step-up in basis.
How do you calculate the disqualification period with a gift of a life estate?
Calculating the amount transferred when you create a life estate is a bit complicated. It depends on your age when you sign the deed and the current interest rates. You take these and use IRS tables found here. As an example, if current interest rates were 4.6% and you were 70 years old when you created a life estate, you would be deemed to be giving away 56% of the property and keeping 44%. The lower the interest rate, the more you're giving away. So, if it were 2.2%, you'd be giving away 74% and keeping 26%.
That said, for all practical purposes, all transfers today should be considered to cause five years of ineligibility for MassHealth coverage of nursing home care.
If you transfer your house 2 years before needing nursing home care, but the value of equity you had is less than the cost of private pay for 3 years, what can you do?
As I understand this question, you've transferred a house with remaining equity after a mortgage of $300,000, but the nursing home costs $150,000 a year, or $450,000 over the remaining three years of the five-year lookback period. So, even if the recipients of the house sold it, they would not have enough money to pay for your care during those three years. The best bet is probably for the recipients to transfer the house back to you. This "cures" the penalty period and permits you to receive MassHealth benefits immediately. It does mean, however, that the house will be subject to estate recovery by MassHealth upon your death.