Updated: Aug 25, 2021
In Wisconsin, the official average of nursing home care, or other long-term care, is $7000 per month, but in our practice we are hearing monthly averages that are quite a bit higher than that, and rising. If you ever need nursing home care, the Medicaid program will help you pay for it—after you "spend down" your assets to the point where you qualify for benefits. If you are married, you likely won't have to sell your home in order to qualify for Medicaid, but Medicaid can make a claim against your estate after your death to recover funds it expended on your behalf. If you are not married, you might receive pressure to sell your house after about six months of residing somewhere other than your home, to make the funds available for care. Either way, Wisconsin has an Estate Recovery Program that pursues repayment of funds advanced for your care during your lifetime. This typically results in a claim against your house. Can you protect your house from Medicaid by giving it to your adult children?
The same sort of contest, challenge, or overturning can happen with trusts, life insurance policies, retirement accounts and bank accounts that have beneficiary designations that go against what you believe were your loved one’s intentions. A will contest can also involve vehicles and real estate that are transferred to surviving joint owners or transfer-on-death designees listed on titles and deeds, against what you believe were the loved one’s intentions. These transfers can usually be challenged and upheld on the same grounds as a will contest.
The answer is a definite maybe. There are some circumstances in which you can transfer your home to an adult child to keep it out of the clutches of Medicaid. Transferring the house can be done in a few different ways, with varying legal and tax implications depending on how you set up the transfer.
The Medicaid Look-Back Period
As you're probably aware, under Wisconsin's Medicaid rules, there is a five year "look-back" period. If you transferred assets to anyone, including a family member, for less than their fair market value during the five years before you applied for Medicaid, your application may be rejected or your eligibility for benefits delayed just when you need them most. Therefore, good planning requires thoughtful attention to this five year “look back” period.
There are some people, under some circumstances, to whom you can transfer your home without incurring a penalty. These include:
Your spouse (keep in mind that that this does protect the house from asset recovery after the spouse passes away)
A disabled or blind child under the age of 21
A caretaker child. A caretaker child is defined as a child of the Medicaid applicant who lived in the home for two years or more prior to the applicant's move to a nursing home and whose care for the applicant delayed the need for nursing home care. (Speak with an elder care attorney to be sure your child qualifies under this standard.)/li>
Your sibling who already has an equity interest in the house and lived in the house during the year immediately preceding your nursing home admission.
Into a certain type of trust for the exclusive benefit of a disabled individual under age 65
You may be thinking to yourself that you don't expect to need nursing home care for at least five years or more, and you know you want your children to have the house eventually. So why not transfer it early to avoid the scrutinizing eye of the government? One reason is that if you have an unexpected illness or injury, you could wind up needing long-term care a lot sooner than you think. The other reason is that transferring the house too early could hurt your children financially.
The Tax Downside of Transferring Real Estate to Your Kids
We often see clients who have directly transferred their real estate (meaning, the primary residence, the lake house, the up north house, and or rental properties) to their children, leaving a life estate interest. However, these clients have unwittingly destroyed an important tax advantage for their children. When your children inherit property from you after your death, they receive a "stepped up" tax basis, which benefits them when it comes time to sell the house. The step up in basis means that their basis in the house is its current value. Why is this important? Because they will pay capital gains on the difference between the selling price of the house and the tax basis (assuming the selling price is higher).
Importantly, if you transfer the house to your kids before death, they do not receive a step up in basis; instead, their basis is whatever you paid for the house. So, when they go to sell the house, the taxes are much higher than if you held onto the house or put it in trust.
Here is a typical example: Let's say you bought your house in 1990 for $100,000. You give it to your children in 2020. If they sell it in 2025, for $300,000, they will pay capital gains tax on the difference, or $200,000. Capital Gains tax is variable, but a typical scenario would be a long term tax rate of 20%. That means your kids will pay $40,000 in taxes.
To compare, imagine that you do not transfer the house, but that the children inherit it from you in 2020, when it's worth $275,000. They sell it five years later, for $300,000. They will pay capital gains tax only on the $25,000 increase in value since they inherited it. If the capital gains tax rate is 20%, that is $5000 in taxes.
The only way that your child or children can avoid capital gains taxes when they sell your house is for them to live there for two years or more before they sell it. If they do so, they are able to exclude up to $250,000 for an individual, or $500,00 for a couple, from taxes. This option is often not feasible for children who have homes and commitments elsewhere.
Giving Up Ownership Means Giving Up Control
You can transfer your house to your children in the hope that they will maintain it as you did or the expectation that they will do with it what you tell them to do. The reality is that once your children own the house that you lived in, they have the legal right to do whatever they want with it, including sell it. You may be confident that they wouldn't disobey you, but if you turn out to be wrong, you won't have a leg to stand on from a legal standpoint.
Even if your children have the best of intentions, the house could still be at risk. If they own it, it will be vulnerable to their creditors if they are sued. If they get divorced, depending on the circumstances, the house could be considered marital property and end up in the hands of your child's ex-spouse.
Another Option is Available
There are good reasons to protect your house from Medicaid or the asset recovery program. However, there are better ways to accomplish this goal without subjecting yourself, your children, or the property to risks outlined in this article. Please contact Hildebrand Law Firm, LLC to discuss the use of a specialized irrevocable trust, which solves many of the problems we have looked at in this article.