As many previous blog articles have discussed, many clients contact our office to discuss their concerns regarding nursing home poverty and preserving their assets for their children from nursing home expenses. However, in far too many cases, parents will transfer their assets to their children and out of their name in order to preserve their Medicaid eligibility in the years prior to going into a nursing home. However, there are a number of reasons why you should not simply transfer assets out of your name and to your children simply to maintain your Medicaid eligibility.
First, Medicaid has a five-year look back period. What this means is that if you transfer assets out of your name specifically for nursing home purposes in order to preserve your Medicaid eligibility within the five year period prior to entering into a nursing home, then the assets that you transferred will still be countable assets toward determining your Medicaid eligibility. Therefore, if you simply transfer your assets out of your name, it is not going to do any good, as those assets will still be countable toward your Medicaid eligibility.
Second, transferring assets out of your name and to your children can have immediate tax implications and obligations for your children. For example, if you leave an asset to your children at death, the asset has what is called a step-up in tax basis. What this means is that your child’s tax basis for determining tax obligations and liability is the tax basis at the moment of death. What I mean by this is that let’s say you inherit an investment worth $200,000 on the date of death. This means that you own a $200,000 asset for tax purposes, and if you immediately turn around and sell that asset for $200,000, then you would owe no capital gains tax on that $200,000 acquisition. However, if you instead were gifted the same $200,000 asset from a parent, but this asset was only valued at $25,000 when it was acquired, then the child that you gifted the asset to would have to pay capital gains tax on the $175,000 gain that was realized. The reason for this is because when you gift an asset away during your lifetime, it has a carry over tax basis. But when an asset is passed to a loved one at your death, it has a step-up in tax basis.
Therefore, instead of simply gifting away all of your assets to preserve your Medicaid eligibility, which may not produce the result that you want, you may instead want to consider an irrevocable Medicaid protection trust. An Irrevocable Medicaid Trust can be used to protect your assets from having to spend them on long-term nursing home care and costs. These type of trusts operate by creating the trust, transferring all of your assets into the name of the trust, while still retaining complete control over the trust assets and retaining all the income produced by any and all of the trust assets.
However, in order for these trusts to work effectively, you first need to set these trusts up and fund these trusts with all of your assets at least five years before going into the nursing home. In addition, you are further not allowed to remove any of the trust assets from the trust and put them back in your own name. However, you are allowed to make distributions from the trust directly to one of your adult children, and then that adult child or children can return those assets back to you the same day, all without affecting your Medicaid eligibility.
Finally, if you never go into a nursing home, the irrevocable Medicaid trust also provides a vehicle for your assets to pass to your loved ones outside of probate. Not only does this avoid the tens of thousands of dollars of financial cost that a probate proceeding could entail, but this allows your children and loved ones to obtain the much favorable step-up in basis as opposed to carry over tax basis discussed above.