Factors to Consider When Advising Clients on Medicaid Transfers
(approx. 2 minutes reading time....)
At least once a week, someone calls our office asking about transferring a home so that they can receive long term care benefits through New York Medicaid. We approach these calls with caution; assisting with the transfer, without explaining the consequences and other options, may result in unintended consequences for the client and liability for us. In contrast, helping clients understand the home equity limit ($893,000 in 2020[1]) and the implications of an outright transfer, gives them the context necessary to make an informed decision.[2]
Once the client understands some context, we can introduce other options which may work better for them. Generally, we are comparing three options: transferring the property outright to heirs, transferring the property subject to a life estate, or transferring the property to a Medicaid Asset Protection Trust (an “MAPT”). Each option provides two primary benefits: (1) the property is no longer available for Medicaid purposes, and (2) the property is no longer subject to estate recovery after the individual’s death. However, the risks associated with the options vary significantly and are outlined below.
- Outright Transfer to Heirs
- Complete loss of control over property
- Property becomes subject to creditors of transferee(s)
- Full transfer penalty applies
- Tax benefits lost
- Transfer Subject to Retained Life Estate
- Partial loss of control over property
- Partial transfer penalty applies
- Outright Transfer to an MAPT
- Partial loss of control over property
- Full transfer penalty applies
The tax benefits referenced above include (1) tax abatements applicable to the individual, but not to heirs, (2) the basis “step-up” that would occur upon the individual's death, and (3) the capital gains exemption (IRC Section 121(a)), that may apply to proceeds when the property is sold. These benefits can be retained if the property is transferred into an MAPT and partially retained if the property is transferred subject to a life estate.
To conclude with an example: Clara is 75 and widowed. She owns her single-family home, which she purchased with her late husband in 1982 (their cost was $100,000). The property is now worth $500,000. [3] Clara has two sons and is considering transferring the property to them. Once Clara has a sense of the tax consequences; namely, loss of her tax abatements and the rather large remaining “step-up,” she may be open to either transferring subject to a life estate or transferring to an MAPT. In her case, this choice may come down to legal costs, but whether she chooses the life estate or MAPT, she and her sons will be in a better position than if she had transferred the property outright.
~ Emily Joseph practices at Weiss Law Group, PLLC.
[1] New York Department of Health, Office of Health Insurance Programs, GIS 19 MA/12, 2020 Medicaid Levels and Other Updates (Dec. 19, 2019).
[2] Another portion of orienting the client is explaining how all of this relates to eligibility, maintaining their home, and estate recovery differently, but that is outside our scope for now.
[3]It is important to note that ownership of her home does not make Clara ineligible for Medicaid because she is below the home equity limit.
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