By Nancy Burner, Esq.
Question: I would like to protect my home by transferring it to my children but am concerned about losing my tax exemption. Is there a way that I can protect my home while still maintaining my exemptions?
Answer: Yes there is. For many of our clients, without the property tax exemptions that they receive, staying in their homes would be a hardship. When faced with the decision of either protecting that home or potentially losing the exemptions, the decision is not an easy one.
The good news is that you can get the asset protection you desire while still maintaining your tax exemptions. One way to achieve this is with an irrevocable trust, oftentimes referred to as a Medicaid protection trust. These trusts enable our clients to maintain a certain level of control and beneficial ownership over their home while garnering the same potential asset protection that they would achieve through an outright transfer.
The way this works is that you as the owner of the property would create a trust; you are the grantor, sometimes referred to as the settlor. You would name a third party (anyone other than your spouse) to act as trustee, and the trust would also provide for distribution at the time of your death to your named beneficiaries. Oftentimes, the trustee and the beneficiaries are one and the same.
Once you transfer the home (or any other nonretirement assets) into the trust, the “clock” begins to run for the purpose of asset protection in the context of Medicaid planning. As you may know, in New York State, we currently have a five-year look back when applying for Chronic Care Medicaid, which means that once assets have been transferred into a properly drafted irrevocable trust and five years has passed, they are no longer countable resources when applying for Medicaid.
The trust is considered a grantor trust for tax purposes, meaning that the grantor is still considered the owner for tax purposes. Because the grantor retains certain rights with respect to lifetime use of the properties in the trust, the grantor is permitted to maintain any tax benefits associated with ownership of the property, including the Enhanced STAR benefit, veteran’s benefit and any capital gains exemptions they would otherwise be eligible to receive.
Contrast that with a decision to transfer the property outright to your children for the purpose of protecting the asset, which would result in a total loss of all preferential tax treatment.
Transferring your home or any nonretirement assets into an irrevocable trust offers flexibility in planning, maintenance in any current tax exemptions and complete asset protection. To determine if an irrevocable trust is appropriate, you should consult an elder law expert in your area.
Nancy Burner, Esq. has practiced elder law and estate planning for over 25 years.