My Spouse Needs Nursing Home Care – What are my Options?
April 27, 2009
Mary and Joe own their home and have $150,000 in savings. They have wills leaving everything to each other and then alternatively to their children, but they have done nothing to address their long term care needs. Joe is now about to enter a nursing home and Mary is faced with spending down to $75,000 and losing Joeâs income before he will be eligible for Medicaid. A classic crisis planning case. Does Mary have any options?
Actually, yes. While she will have to spend down there are ways to spend that will be more beneficial for Mary. Letâs go through a list of some of them. At the top of the list is setting up an irrevocable burial fund to pay for both of their funerals. Better to do that now. Otherwise sheâll have to take that expense out of what Medicaid says she can keep. Other strategies focus on exempt assets, the house and a car. Mary will keep the house and one car. Of the $75,000 that she has to spend down she could fix up the house. That might include replacing an old cooling or heating system, installing new windows and/or siding and remodeling the interior. If she makes improvements that enhance the value of the home should she decide to sell that will result in more money for her to live on.
How about her car? Mary has a 10 year old car. It is better for her to purchase a new car as part of the spend down. Or perhaps she has a car loan that she is paying off over time. Paying it off before applying for Medicaid may be the better alternative. That applies for other debt, such as credit cards or other installment loans. Finally, Mary ought to look at anticipated expenses. For example, if she or Joe needs dental work now may be the time to do it.
Some of the spend down will need to go to the nursing home to pay for the cost of care at its private pay rate so it is important to determine what amount will be necessary to get Joe into a quality facility. Knowing that, they can then work backwards to determine what they have left to spend on the other items. Additionally, if Joe is not yet in the hospital or nursing home it may be possible for Mary to keep more than $75,000 by taking a home equity line of credit (more on that in next weekâs post).
A word of caution, however. One size does not fit all. What is best for one person may not be right for another. Medicaid rules are very complicated and quite technical. Before taking any action it is best to consult with an elder law attorney well versed in Medicaid law. But, if done properly, Mary can preserve more than the 50% of assets that Medicaid laws say she can keep. This is especially important, given the possibility that Mary may outlive Joe by 5 or 10 years or more.
How Long Term Care Can Destroy an Estate Plan
April 20, 2009
Whenever we meet with new clients, especially married ones, I always want to review the estate planning documents that they currently have. Sometimes those documents are 10, 20 or 30 years old. Other times, the clients will say, âOh, we just had our wills updated in the last year so weâre good there. Yet, when I review the documents, I find that they are not suitable for their current needs. How can this be?
Very simply, no one considered how long term care costs can completely destroy an estate plan. As I have explained in previous posts, when one spouse needs nursing home care and the other does not a spend down must occur. The healthy spouse gets to keep one half of the coupleâs assets up to a maximum of $109,540 and a home, if he/she is living there. The ill spouse can then get Medicaid. But, what happens if the healthy spouse dies first?
Well, in most cases the will provides that everything is left to the surviving spouse and then to the children after the second spouse dies. Or, perhaps, the will establishes a bypass trust for the surviving spouse, to save on estate taxes. In either case the assets will now be accessible to the surviving spouse who is on Medicaid. One of two things will happen. Either the assets must be given to the State to pay back Medicaid benefits received and the surviving spouse can continue to receive benefits. The alternative is to terminate Medicaid and begin private paying for care until all the assets are spent and then reapply for Medicaid.
Neither scenario is very appealing and need not happen if we modify the will. Instead of leaving everything to the surviving spouse we leave the assets to a trust for that spouse, but, and here is the key, a trust that will not be counted for Medicaid eligibility purposes. Now, those assets are available to be used for other needs not covered by Medicaid. And when the surviving spouse passes away, there will likely be something left to pass on to the next generation, an important goal for many families.
Does this mean that everyone should set up their will in this manner and that leaving everything to your spouse is the wrong thing to do? Not necessarily. What I am saying is that you do need to sit down with an elder law attorney who is well versed in the long term care system. You may have a will that was suitable for your needs at the time it was created but things change and your plan may need to be changed too. You may be leaving yourself vulnerable. The State says you have to spend down most of your assets towards long term care. With a poorly drafted estate plan you may end up spending all of your assets towards care, something even the State doesnât require you to do.
Thinking About Transferring Your Home – Have You Considered the Tax Implications – Part 2
April 13, 2009
In my last post I explained how Momâs transferring her home to me during her lifetime will result in capital gains tax whereas passing the home to me after she dies can reduce or even eliminate the tax. However, Mom considered transferring the house because she wanted to protect it from being consumed completely by the cost of long term care, especially important where other family members live in the home.(See my posts on 2/23/09 and 3/2/09).
Right there is the dilemma. What to do? Capital gains tax, at worst, will never consume the entire proceeds of sale. Long term care, however, could easily exceed the home value if it is needed for several years. But do I have to really choose between the two? Well, maybe there is another way.
Putting the home in a trust, if set up properly, can accomplish both goals. The home is removed from the parentâs name and, if done 5 years or more before needing long term care, will be outside the Medicaid lookback, that time frame within which Medicaid looks to confirm that you have in fact spent all your money and havenât given it away. At the same time, the trust can be set up in such a way that the assets it holds will be part of Mom’s estate and she will be able to take advantage of both the capital gains tax exclusion and the step up in basis that I discussed in my last post.
We accomplish the best of both worlds. The home can be protected and tax advantages will not be lost. But, there are even more potential benefits. Since the home is not in the childâs name but in the trust, it is not subject to the childâs creditors, or to being split with the childâs spouse in a divorce. Additionally, if Mom needs care within 5 years of the transfer, the home can be sold or borrowed against to help pay the cost of care. In other words, some of the asset can be used for care but not all of it need be consumed.
As you can see, a simple question, or so you thought. Is home transfer right for you and your family? Well, that depends on many factors, including the health of the parent, what other assets exist to pay for long term care and what goals the parent and child want to accomplish. One thing is for sure. Planning early makes things easier and the outcome so much better than waiting until a crisis hits.
Thinking About Transferring Your Home – Have You Considered the Tax Implications? – Part 1
April 6, 2009
"Mom wants to transfer her home to me. Do you think itâs a good idea?" A seemingly simple question and one that is probably one of the more common questions I am asked as an elder law attorney. But, not one that I can answer without knowing more. One size does not fit all.
The home is typically the largest asset people have and they are frequently and understandably emotionally attached to it. The primary residence also enjoys special tax treatment and that is what most people fail to consider when they make the decision. Let’s run through the basics.
Real estate, like stocks, bonds and other investments, is subject to capital gains tax. If Mom bought her home for $100,000 and sells it for $500,000 she has what is called a "realized gain" and Uncle Sam will want to tax her on that gain. The gain is calculated by taking the amount she sold the home for and subtracting the âcost basisâ. The cost basis is her purchase price plus capital improvements (eg. addition, new roof, windows, siding) and closing costs.
In my example, if Mom made no improvements her gain is $400,000. The capital gains tax she must pay is based on her tax bracket. The higher the bracket the higher the tax, although capital gains tax rates are lower than for regular income. Letâs say her tax rate is 20% so her potential capital gains tax is $80,000. I say âpotentialâ because, if the home was her primary residence in 2 of the 5 years before she sold it then she can exclude up to $250,000 of gain. Married couples can exclude $500,000 of gain.
If Mom transfers her home to me and I donât make it my primary residence then when I sell I wonât be able to exclude any capital gains from tax. But, Mom still intends to live in the home. I donât want to sell it until after she passes away. Is there a way to avoid the capital gains tax, entirely?
Yes, by invoking something called the âstep up in basisâ. If Mom owns the home when she dies and passes it to me upon her death my cost basis when I sell is not what she paid for it, but rather what it was worth at the time of her death (or, alternatively, 6 months after her death). If I sell it immediately after she dies my capital gains is zero, and thus, there is no tax. If I sell after Mom dies, but she transferred it to me during her lifetime, then I owe Uncle Sam capital gains tax.
So, then thatâs it, right? Mom shouldnât transfer the home to me. Well, not so fast. What if Mom gets sick and needs long term care? Weâll tackle that one in next weekâs post.
Elder Law Today Show #16 Mom is Not Capable of Handling Her Affairs – When is a Guardianship Appropriate
April 3, 2009
Podcast: Play in new window | Download
Mom is unable to handle her affairs and either canât or wonât accept assistance from other family members. Or maybe one child lives close by and is taking advantage of mom and other family members, who live a distance away, are frustrated in their attempts to protect mom. Is guardianship a solution?
In Show 16 of his monthly elder law podcast, Yale Hauptman, a practicing elder law
attorney discusses when a guardianship is possible and when it isn’t. Does Mom need to be declared incompetent? How does that happen and what is the standard? Yale also discuss what options are available
when a guardianship isnât possible, such as a conservatorship.
If your family is grappling with these issues or you know someone else who is, then you’llwant to tune in to learn more.
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