Call it the ultimate, unintended consequence: a plan intended to preserve your children’s inheritance that triggers a family feud instead. "We’re seeing more litigation among family members as a result of Medicaid planning," says Jennifer B. Cona, an estate lawyer at Cona Elder Law in Melville. Medicaid planning typically requires you to give away your assets at least three years before you’re likely to need long term care. The goal: to qualify for nursing home benefits without first having to spend your kids’ inheritance on your care. Many parents transfer everything to one child, who is eventually expected to share with his or her siblings- but----doesn’t always do so. The result can be ugly.
Luckily, taking the right steps can make that unhappy outcome less likely.
The solution, says Cona, is a family agreement, a contract that all your kids sign during your lifetime. Inn some Medicaid plans, she adds, such an agreement can be a good substitute for a trust. The cost is the same----about $2,500 in legal fees.
This type of agreement is particularly well suited to situations which one child moves into the parent’s house to provide care, explains Cona. Normally, transferring assets to another person delays your Medicaid eligibility for up to three years, and transferring them to a trust delays your eligibility for up to five years. But there’s no such penalty when you transfer your house to a "caretaker child" – an adult child who lives with you for at least two years before you enter a nursing home. You can transfer the house to that child without delaying Medicaid benefits.
Mom typically wants to leave an inheritance to all her children. But if she puts her house in a trust, naming them all as beneficiaries, it will delay her Medicaid eligibility. A written family agreement lets her avoid that delay, and still ensures that her wishes are carried out. The agreement states that after Mom’s death, the caretaker child must sell the house and share the proceeds with siblings. The pact can be tailored to fit the family’s circumstances, note Cona.
"For example, we had we had a case where the caretaker daughter had kids in high school," she said. "Her siblings agreed that she could live in the house until her youngest child has graduated."
Mom must file a gift-tax return when she transfers the house-but no tax is due unless her gift is worth more than $1 million. (That’s the amount you can give away during your lifetime without incurring a gift tax.) The gift has no estate tax impact unless Mom has a taxable estate- one worth more than $1.5 million.
Cona recommends that if you transfer your house to a child, you retain a life estate for yourself. This gives you the right to live there for the rest of your life. It also preserves a big tax break for your child: She can sell it at market value after you die without incurring any taxes.
An example: Let’s say you originally paid $50,000 for the house, and spent an additional $35,000 on capital improvements. Your total investment: $85,000. Your child sells the house for $450,000. What’s her taxable profit?
If you didn’t retain a life estate, her taxable profit is $365,000 – the difference between the $450,000 sale price and your $85,000 investment. But if you did retain a life estate, the entire $450,000 is tax-free. Let’s say the family agreement calls for the daughter to split that $450,000 equally with her two brothers. She gives them $150,000 each. Thanks to the family agreement, the $150,000 that each receives is considered a cash gift from Mom. None of them owes income taxes on this money, because the gifts are never taxable to the recipient.