Mon, 13 April 2009
In my last post I explained how Mom’s 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 parent’s 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 haven’t 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 child’s name but in the trust, it is not subject to the child’s creditors, or to being split with the child’s 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.
Category:Long term care planning -- posted at: 6:00am EST