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CASE OF THE MONTH – DOOR #1 OR DOOR #2?

Dad, a nursing home resident in a facility that accepts Medicaid, owns highly appreciated out of state real estate that has been in the family for decades and approximately $100,000 of cash. The goals are to protect the real estate, have governmental assistance in paying for care costs without adverse tax ramifications and to avoid probate in two states.

If dad became eligible for long-term care Medicaid, there would be savings of approximately $6,000 per month (since that is the amount that cost of care exceeds his income).

Besides Medicaid bed availability, there are two major eligibility issues – excess resources and the transfer penalty rules if the real estate or any of the cash was transferred for less than fair market value within five (5) years of the Medicaid application (the “look-back period”).

Although transfers within five (5) years for less than fair market value are penalized (the presumption is that the transfer was made purposefully to reduce assets to receive Medicaid assistance since the countable resource limit is $2,000), it doesn’t mean that there is five (5) years ineligibility as the state looks at the amount transferred and divides that amount by the average daily cost of a nursing home in Texas (presently $172.65 per day) to determine how many days of ineligibility from the first day of the month of application and from when the applicant is otherwise eligible but for the transfer.

One option presented was to simply place the real estate up for sale and then purchase a Medicaid compliant annuity that would pay the difference between the cost of care and the applicant’s income with the annuity terminating at the same time as a transfer penalty. The pros for this option:

  • Real estate placed for sale at fair market value does not count as a resource under the Medicaid eligibility rules leaving only the $100,000 of cash as an obstacle to eligibility. The children of the applicant have the financial capability to purchase dad’s real estate if a reasonable offer was received; and
  • If the property is placed for sale (and not sold), then a mathematical formula is used to determine how much would be needed to purchase a Medicaid compliant annuity that would terminate at the same time as a transfer penalty for gifted funds so that the countable resources are below $2,000 and the transfer penalty would begin to run. In this case, it would simply be a matter of months before the transfer penalty would expire.

The cons against this option are if the real estate is sold during dad’s life: 

  • There would be substantial capital gains tax which would be avoided if dad held the real estate until his death (since there would be a “step-up” in basis); and 
  • The cash proceeds would be countable resulting in ineligibility likely for the remainder of dad’s limited life expectancy since he is very elderly and there would likely be too much cash to do any transfer planning.

The second option would be either to (a) transfer the real estate to an irrevocable grantor trust in which dad retains certain powers where the real estate and the assets in the trust are still treated as being owned by dad for tax purposes; or (b) transfer the real estate to a child with the child creating a trust giving dad the right to appoint assets in the child’s trust back to his own estate. Dad would then simply use his cash to pay for his care until the cash was exhausted.

The pros of this plan are:

  •  That probate would be avoided;
  • Step-up in basis (less or no capital gains tax on sale of real estate after dad’s death); and 
  • The real estate would continue to be owned by the family.

The negatives of this plan are:

  •  That there would be several years of ineligibility (due to the value of the real estate); and
  • The cash that dad presently has would not likely last for the transfer penalty. As a result, the children would have to make up the difference between dad’s income and the cost of his care.

Although there has been no chosen strategy made yet, this case is an illustration of how many issues (public benefits, tax and probate avoidance) must be considered before going forward. Door 1 or Door 2?

If interested in learning more, consider attending our next free “Estate Planning Essentials” Workshop either Saturday, April 27, 2019 at 10:00 a.m. or on Thursday, May 23, 2019 at 1:00 p.m. by calling us at (214) 720-0102 or signing up online at www.dallaselderlawyer.comor by clicking here. We are also having a Facebook Live Event on Saturday, May 4, 2019 from 10:00 a.m. to 11:00 a.m. Attendees of the live webinar (and the “Estate Planning Essentials” workshops) will be eligible for a free one hour vision meeting with Michael B. Cohen. Please RSVP to the “Facebook Live Event” by clicking hereand then click “going” to submit your questions for Michael B. Cohen (you must be logged in to Facebook in order to RSVP). You may also submit your questions for the “Facebook Life Event” by clicking here.

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