Long Term Care Planning 2012 FAQs: The Truth About Property Transfers

Q. My friend put her home in her daughter’s name in order to protect it against future possible long term care claims. I am a widow and am thinking about doing this. Is it a good idea? A. Probably not. If you were to simply transfer the home to your child, there would be several negative consequences. First, you would lose any senior citizen tax exemptions as well as any Veteran’s tax discount you may be receiving. The home would be subject to your child’s creditors (including spousal claims in the event of a divorce). Lastly, there would be capital gains consequences upon the subsequent sale of the house after death. This is because the home is a gifted asset so children take your cost basis in the house. In other words, after your death, your children will be taxed on the difference between the price that you purchased the house for and the actual sale price. Children are generally unable to use their $250,000 exemptions to offset the tax because the home is not their primary residence. Nor would they be entitled to the step up in tax basis afforded to the assets of a decedent because you transferred away the house prior to your death. Instead of making an outright (simple) transfer, you may consider transferring the home to a properly drafted asset protection trust. The purpose of transferring the residence is to protect the value of the home from future possible long term care expenses. The trust should clearly state that you have lifetime ownership rights. This is an important psychological protection and will also enable you to continue receiving your tax exemptions. Upon death, the fair market value of the residence will be included in your estate (those with an estate of over $1.0 million need additional advice at this point), but is probably not taxable unless your assets are above $1.0 million (in which case, a Qualified Personal Residence Trust may make more sense). The children would own the entire interest in the residence by operation of law. The residence would not be subject to a probate proceeding. This is a great advantage of this option. Also, this transfer to a properly drafted trust will result in a step up in basis for income tax purposes upon your demise which will minimize any income taxes on the subsequent sale of the residence. In other words if my late husband and I bought the house for fifty thousand ($50,000.00) dollars in the 1970s and the children sell it for $750,000.00 upon my death, they will not have to pay any capital gains taxes! This tax break is far greater than the $250,000.00 exemptions upon sale during my life. Again, the single biggest reason, however, that people transfer property into trust, is to protect the value of the home from future possible long term care costs. As you may know, Medicare will pay the first 20 days of rehabilitation following an acute illness or operation. They will then pay 80% of the next 80 days. After that, however, astronomical expenses can accrue. The bottom line is that with good advice and proper advance planning, you can implement strategies to protect yourself and your family in the event of a long term illness.