Should I Be Putting Property in My Children’s Names?
Elder Law attorneys hear this question constantly. Typically, once people reach a certain age there is an invisible pressure to transfer assets out of one’s name and into that of their children. Some people feel that if they do not do this, the “State” will take their money either in taxes or for the costs of long term care. Along with the real issues that seniors should be considering regarding transferring their property, there are also many myths.
First IssueThe first issue that seniors worry about is that they should give away assets before they pass away to avoid taxes. Currently, the Federal Estate Tax exemption is $5,450,000.00 per person, indexed for inflation. That means that each person can leave $5,450,000.00 to anyone without a tax consequence. Married couples can leave $10,900,000.00 together, and the surviving spouse can use any unused portion of the first spouse's federal exemption. The New York State Estate Tax exemption is currently $4,187,500.00 per person, and is set to increase by about $1,000,000.00 each year until it matches the Federal Estate Tax exemption amount in 2019. For the average person, taxes are not an issue.
How It May Affect Your Medicaid EligibilityWith the Federal and State exemptions being so high, the primary concern for the average person is asset protection for the cost of long term care. The Medicaid program in New York will pay for the cost of long term care in a nursing home facility or for care in the home. For nursing home care, Medicaid requires the applicant to have no more than $14,850.00 in assets and there is a five year lookback. This means that a penalty period will be assessed for any assets transferred for less than fair market value within five years of the submission of an application for Medicaid. While it is true that the five year lookback applies whether or not you transfer assets directly to your children or to a trust, the negatives of an outright transfer far outweigh the convenience and low cost. Once you transfer assets to your children, those assets belong to your children and are subject to their creditors. For instance, if you transfer your house to your child who then incurs a large debt, the creditor can come after your home. If your child passes away before you, the house will be part of their estate and their spouse will have an interest in your home. Moreover, if you later decide to sell your home, it is your child who must agree. Lastly, as described above, if your child does sell your home there may be a large capital gains tax due because they take the property at your cost basis and cannot use the $250,000.00 exemption if the property is not their primary residence. For all the foregoing reasons, the prudent way to protect assets for Medicaid is to use a trust. Unlike the trust described for tax planning above, the grantor of a Medicaid Qualifying Trust will retain many rights over the property during their lifetime. For instance, the grantor is entitled to exclusive use and occupancy of any property in the trust and any income generated in the trust. The grantor may also change the trustees and/or the beneficiaries at any time. Lastly, when the grantor passes away the property in the trust gets a full step-up in basis to the date of death value. Accordingly, if the child sells the property they inherit, there will be little or no capital gains tax due. Transferring assets is a complicated matter. While the notion that assets are vulnerable to creditors is a reality for everyone, it is typically not the best plan to make outright transfers to your children. Before transferring anything, consult an Estate Planning attorney in your area to learn more about what kind of planning best suits your individual needs. By: Nancy Burner, Esq. and Kimberly Trueman, Esq.