Saugus Advertiser December 18, 2003

PROTECTING THE HOME – PART 2

Hi, I’m back from vacation. I’ve learned that you can have a lot of fun in Las Vegas, but it’s not the best place to invest your money.

This week I’d like to discuss what happens when you place your home into a trust for nursing home purposes.

The benefits of transferring your home into a trust is that it will avoid probate, give your children a step-up in basis (allows them to sell it tax free after your death), allow use of the $500,000 ($250,000 if single) gain exclusion is sold during your life and protect it from nursing home costs.

The leading case regarding trusts is Cohen v. Commissioner of Div. Of Medical Assistance, 423 Mass. 399, a 1997 case that said that if the trustee has the ability to distribute ANY principal then, all of it is counted as an asset for MassHealth purposes. After this case the Irrevocable Income Only Trust (IIOT) became the standard for protecting the house. Under the IIOT the elder may only receive income and never any principal. Since the elder could not get the principal back, neither could the Division of Medical Assistance. Now comes the expanded estate recovery, effective July 1, 2003, that says the DMA can recover against “real and personal property and other assets in which the member, immediately prior to death, had any legal title or interest, to the extent of such interest.” The question now becomes, is the right to income or the right to live in the house an interest that may be liened? At the present time opinions vary as to the ability of DMA to lien these interests.

There is one law change in 2003 that we need to consider when placing a home into a trust, the expanded estate recovery. There is also the Waiver that Governor Romney applied for on August 28, 2003; this has not yet been approved by the Center for Medicare and Medicaid Studies, the Federal governing body.

The Waiver is a 33 page proposal describing perceived problems with the Medicaid system and proposed changes. It allows for an exclusion of the home to the extent it's fair market value is $300,000 or less. This means that if it’s fair market value is $300,000 or less we are to apply the existing rules for determining the disqualification period that say there is a 5 year look-back period and the disqualification period begins on the date of the gift. If the house is worth more than $300,000, the excess is subject to the more stringent rules of a 10 year look-back and disqualification period starting on the later of the date of admission to a nursing home or when you are otherwise eligible for MassHealth benefits.

The Expanded Estate Recovery became effective July 1, 2003. It allows the Commonwealth to recover against many assets that were protected under prior law, if you, or your spouse are unfortunate enough to need nursing home care. One of the main things that it changed is the way MassHealth treats life estates.

A life estate is a deed transferring the property to your children but retaining the right for you to live there. MassHealth will calculate what the life estate is worth on the day before you die and lien that amount.

Having a life estate in your trust could has always been acceptable and some attorneys believe that it still is acceptable under today’s rules. In light of the expanded estate recovery, the most conservative attorneys severely limit your rights regarding the trust property. In stead of giving you the right to a life estate and to income from the trust, your only right would be to be able to rent the property at a fair rental value. The idea is that you are protecting the home and the cash that has been paid to the trust for rent.

There are many options in between. The goal is to not have the right to remain in the house be the equivalent of a life estate, protecting it from the expanded estate recovery.

Who Should Consider Transferring the Home into a Trust:

The first thing you need is a good crystal ball! Unfortunately, most of us don’t have one so we do the best we can.

You need to be able to stay out of a nursing home for a certain period of time. “How long?” you say.

The amount of time can be calculated by dividing the assessed value (from your real estate tax bill) by $244(average daily nursing home cost). This equals the number of days you are disqualified from benefits due to making the transfer.

The Division of Medical Assistance’s (DMA) Eligibility Operations Memo 03-14, dated November 1, 2003 the revised average cost for nursing home care increased from $219 to $244 per day. This is effective for MassHealth applications made after November 1, 2003 and is adjusted annually.

Let’s say that your home is worth $300,000 or less and you transfer it to an irrevocable trust or transfer it outright to your children. Under the Waiver, the look-back and penalties will be as they are today.

The disqualification period would be 1,230 days ($300,000/$244=1,230), or about 41 months if transferred to a trust or the maximum of 36 months for a gift not involving a trust. This means that if you or your spouse needs nursing home care within that period you would have to private pay for that time period.

Now lets say that your house is worth $500,000 and you either transfer it to an irrevocable trust or to your children outright. Let’s assume:

1/1/03 transferred home worth $500,000

9/1/04 Waiver program implemented

1/1/05 Nursing home placement

1/2/06 Client has less than $2,000

How would eligibility be calculated under the proposed federal waiver?

· Since more than three years have passed since the date of the transfer, there would be no transfer Penalty as to the first $300,000

· The remaining $200,000 of equity in the home would be subject to a 5 year look-back under the waiver program

· This is the bad part, the penalty would begin on 1/2/06, the date that the elder is financially eligible, he has less than $2,000

· Under current rules, eligibility would be delayed for just over 27 months ($200,000/$244=27.3 months)

· Where will the money come from to pay for these 27 months?

Some practitioners have suggested an outright transfer of the home to the younger generation or transfer subject to an unrecorded occupancy agreement. While these may work well in cohesive families, no one can predict the financial future of the transferees or the possibility that they may become the object of legal action (including divorce) whereby the transferred property may become subject to attachment. If these concerns are present, perhaps a Medicaid house trust should be considered.

This article gives general information and not specific advice on individual matters. Persons wanting individualized advice on matters discussed should contact an advisor experienced in those matters. To the extent this article provides information on legal matters, it is based on law in effect in Massachusetts on the date of posting (laws in effect in other states are often quite different).

Ronald H. Surabian is a CPA and attorney who works at the Elder Law Center in Saugus, Ma. He also holds a masters in accounting and a masters in tax law. He currently serves on the board of directors of the Massachusetts Chapter of the National Academy of Elder Law Attorneys.

Elder Law Center

One Essex Street

Saugus, Massachusetts 01906

Telephone 781.233.4444 Fax 781.231.2222

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