One option many seniors explore is transferring their property to a family member, such as an adult child or grandchild or joint ownership. The goal is to preserve your assets. But you also want to consider your eligibility for Medicaid if you need long-term care in the future and tax implications.
Here are some issues to consider when deciding whether transferring your property is the right choice for you.
Medicaid implications when transferring your property
You can own property and still receive Medicaid for long-term care, such as if you, your spouse, or a dependent currently live in the property.
However, transferring property can have some long-ranging impacts, including ineligibility for Medicaid with a set period — often a five-year look-back from when the property was transferred. However, these rules also vary per state, so be sure you understand the Medicaid rules for your state.
Tax implications when transferring property
Before transferring property, you’ll also want to consider the tax implications to make sure you or the person you’re transferring the property to doesn’t have any surprises at tax time.
For instance, adding a family member as a joint owner so the property will pass to them on your death is considered a gift of 50%. So if the value exceeds your annual exclusion limit, the donor will need to file a gift tax return to report the transfer.
Another situation is if you gift your property to a family member. Real estate gifts are not tax deductible, so you can’t claim a loss. If the value of the gift (i.e., the property) exceeds your annual exclusion amount, the donor again must file a gift tax return.
Establishing a trust to protect your property and Medicaid eligibility
A trust can help protect your home and potentially help you avoid probate. But the results and potential consequences on Medicaid can depend on when it is set up, your situation, and the value of your property, and the type of trust.
A Medicaid Asset Protection Trust may protect your home, but these trusts come with strict rules. When one is established, the home is no longer the trustmaker’s property and can’t be taken by the state. But this trust can’t be changed or canceled, and the trustmaker can’t have access to any asset placed in it. Additionally, the trust may still be held accountable to Medicaid’s look-back rule.
When deciding whether to transfer your property or set up a trust, there isn’t one right answer. However, an estate attorney or financial planner can help you determine the best choice for your situation. Because there are severe penalties for mistakes made when transferring or setting up trusts.