I was speaking with a family recently from right here in Nashville and this husband and wife indicated that they were going to start getting assets out of their name in order to qualify for Medicaid and start that five year look back period. Specifically, this couple wanted to stay in their home, but they were going to Quit Claim the deed to their home to their adult son to start the five year look back period.
I explained to this couple that quitclaiming the deed to your home or any real estate to your adult children is not usually a very good idea. Specifically, I explained that you lose immediately control over the real estate, and if your son or daughter wanted to, he or she could force you out of the property. In addition, should your planning needs change in the future, your adult child is under no obligation to return the property to you.
In addition, I discussed with this couple that another important reason not to quitclaim your home to your adult child is that it has significant gift tax consequences. I explained that the IRS allows you to give away $14,000 or $28,000 of joint assets each year, to whomever you want, with no tax consequences. However, if you give away more than this amount, then your lifetime gift and estate tax exemption, which currently stands at $5.4 million, is reduced by the amount you gave away over $14,000 or $28,000.
For example, I explained that their home, which is worth $1.5 million, if they quitclaimed the deed to this property to their adult son, the IRS would consider them to have made a taxable gift in the amount of $1.472 million. Therefore, their lifetime gift and estate tax exemption would be reduced from $5.4 million to $3.928 million, and if they die with more than $3.928 million in assets, their surviving family members will have to pay an estate tax on the amount over $3.928 million.
I discussed with this couple that a better legal strategy would be to set up an irrevocable Medicaid trust. I explained that the Medicaid rules allow you to set up an irrevocable trust and transfer all of your assets into the name of this trust, and so long as you set this up five years before nursing home expenses begin, your assets will be protected from Medicaid spend down. In addition, I explained to this couple that you will continue to have control over all of these assets and can buy, sell, manage, and give them away throughout your lifetime. However, if you want some of these assets back to spend them on yourself, you will first be required to make a distribution from the trust directly to one of your adult children, and then that adult child can give those assets back to you the very same day so you can spend them on yourself.
In addition, and even more importantly, there are no gift tax consequences in this strategy as opposed to quitclaiming your home to your adult son, as well as the benefit of being able to continue to control all of your trust assets throughout your lifetime.
If you have questions about estate planning, irrevocable and revocable living trusts, and avoiding nursing home expenses, please reach out to me before you go see any other lawyer or make any other decision on your estate planning so I can send you our free legal report “Estate Planning in Tennessee,” which goes over all the common questions about probate in Tennessee, Medicaid, nursing home expenses, and protecting your assets for your loved ones.