Giving Away Your Home? –Beware

We all know that the possibility of incurring disastrous nursing home costs is the biggest threat to most people’s estates today. Now that we have an exemption of $5.25 million from estate taxes, only the wealthiest 0.14% of Americans will pay this tax. In other words, 99.86% of us don’t have to worry about the estate tax anymore. What about probate? You may have heard horror stories from the 1980s about probate costs eating up half of the estate. Well, the probate process has been streamlined. We now have informal probate procedures. The actual cost of probate now usually amounts to only about 1% of the estate value. So the real danger is the rising cost of nursing and health care.

By now, most of my readers know that the Medicaid government assistance program will pay health care costs for people who are impoverished, and that Medicaid can cover your nursing home costs when you run out of money. You may have also heard that if you do receive Medicaid benefits for long term care costs, the State of Hawaii will put a lien on your home so that when you pass away they can recover back from the value of your house every penny they’ve spent on your care. What’s the solution?

The Dangers of Giving Your Home Away

A lot of people think that the best thing to do is to give their home away to their children or other loved ones 5 years before they might need nursing home care so that they can still qualify for Medicaid benefits and the State can’t put a lien on their property. However, doing this could put you at risk. What if you give your home to your son and he later kicks you out of your own home? Even if you have a good relationship with your child, is it possible that your daughter-in-law or son-in-law could be the one to kick you out of your house after giving the home to your child?

Here’s a sad but true story of one local couple who gave their home away without legally protecting themselves adequately. They had only one son and knew they wanted to leave their house to him when they passed away. They didn’t want him to have any trouble with probate when they died so they went to a lawyer and signed a deed transferring the house to their son while they were still living. A few years later, the son and their daughter-in-law got into a terrible car accident and both passed away—the son first, and then his wife second! Neither of them had a will or a trust. According to the laws of the State of Hawaii, when the son died, the house went to his wife. When she died shortly after him from the same car accident, HER parents inherited the house. She was from Europe and her parents lived in Germany. When the lawyer called to tell her parents that they inherited a house from their daughter in Hawaii, they said “We don’t need a house in Hawaii” and they SOLD THE HOME keeping the proceeds! This left the local couple homeless in their old age. This was totally unexpected, but it’s the kind of thing that could happen if you give your home away without protecting yourself.

The Life Estate Solution

If you are sure you want to give your home away to a loved one, we usually recommend that you keep a “Life Estate” or the right to live in, use, control, and rent out your home for the rest of your life. This provides you with several benefits: 1) Nobody can kick you out of your house; 2) You can keep your homeowner’s exemption for county property taxes; 3) It avoids probate because you’ve already transferred the remainder interest to your loved one during life; 4) Your heirs get a stepped-up basis on your home when they inherit it from you after you pass away; 5) If you go to a nursing home and Medicaid puts a lien on your Life Estate, as long as you don’t sell your home during your lifetime, we can get the Attorney General’s office to remove the lien after you pass away without your heirs paying back one red cent!

Why an Irrevocable Trust Is Even Better

So you might think that giving away your home to your children or other intended heirs while keeping a life estate for yourself is the best thing to do to plan ahead in protecting your assets from nursing home costs. However, giving your home to an irrevocable trust for the benefit of your heirs (while keeping a life estate) is actually better than giving your home directly to your loved ones.

Many people are frightened by the idea of an irrevocable trust. Just the word “Irrevocable” can sound so intimidating. It sounds so permanent and unchangeable. They fear that once they transfer the home to the irrevocable trust, they’ll lose all control over their home and they’ll never be able to sell it. There are a lot of myths about irrevocable trusts and most people—even many lawyers—don’t accurately understand them.

For example, I had one client come into my office and bring me a copy of their “irrevocable trust” that another lawyer made for them. He had told the client that this would work to start the 5 year lookback clock ticking in order to qualify for Medicaid for nursing home costs and yet protect his home. When I looked at the client’s “irrevocable trust”, it was nothing more than a standard revocable living trust, which the lawyer had made an amendment to changing it to be irrevocable. Although it did become an irrevocable trust at that point in time, which meant it could no longer be amended or canceled, it did NOT protect his home for Medicaid planning purposes and did not start the 5 year period for lookback purposes. Why? Because the revocable living trust said that the client is the trustee and the primary beneficiary of the trust during his lifetime. Just because the lawyer amended it to make it irrevocable—so the client couldn’t make any more amendments—did not mean that it was an irrevocable trust that would work for Medicaid planning. If you are the beneficiary of any trust, whether revocable or irrevocable, any amounts that could be distributed to you from that trust will be considered your available resources for Medicaid qualification purposes.

The Advantages of a Properly Drafted Irrevocable Trust

So what is the advantage of using a properly drafted Irrevocable Trust for Medicaid asset protection purposes? One reason is asset protection for your beneficiaries. If you just give your home 1/3 each to your three children and keep a life estate, they can’t kick you out of your house, but they could sell their 1/3 share of the inheritance (future use/ownership of your home) to a stranger, or they could have their share taken away from them by a divorcing spouse or by a creditor in a lawsuit or bankruptcy. This is probably not your intention.

Another reason is that you can designate who (other than yourself or your spouse) can be the trustee to manage the assets for the beneficiaries. Let’s say that you have three children, all of whom you would like to inherit equally from you after you pass away, but only one whom you would trust to have control of your finances or of your home while you are living. You can name your most trusted child as trustee, knowing that the rascal beneficiary can’t do any mischief with your assets as the trustee has complete control of the irrevocable trust’s share of the home (or other assets). If you don’t trust any of the children because they might all try to cheat each other, you could name your best friend or a local bank to be the trustee and know that your wishes would be carried out during the rest of your life—even if you become incompetent—and also after your death.

Finally, if you ever wanted some of your assets back, it can be tricky to get them back once you’ve given them away. If you give directly to your children or other beneficiaries, they might not be willing to give your home back to you even if you ask nicely. However, with an irrevocable trust you haven’t given it to the children yet, you’ve only given it away to the trust. Even though the trust is irrevocable, you can still have the right to make assets come out of the trust before you pass away and go to other beneficiaries than you originally intended. Yes, you can do this even though the trust is irrevocable and can’t be amended—but only if the irrevocable trust is created properly with very flexible language from the beginning. Of course, you may not be the beneficiary to receive the assets directly from the trust, but you can make it all come out of the trust and go to your most trusted child or best friend…and if you ask them nicely, they’re more likely to be willing to give those assets back to you.

Our Solution: A Powerful and Flexible Irrevocable Trust

Although it sounds unusual, we have perfected the drafting of an irrevocable trust for Medicaid asset protection purposes. Our clients can get their assets out of the trust and to any trusted beneficiary while still alive. Another unusual feature we offer is the ability for the client to rent out their home while in the nursing home and having the irrevocable trust receive the rental income for the benefit of the family (or to maintain the home) instead of it all going to the client and then having to be paid to the nursing home (which is the case if the client keeps a life estate in the traditional way).

The message to take home today is that you do not need to be afraid of an irrevocable trust if it has been prepared by a clever attorney who builds a lot of flexibility into your plan. Our irrevocable trust for nursing home Medicaid asset protection is our most popular estate plan. When clients learn how powerful it really is and what can be done with it, they usually decide that it’s the best plan for them—especially if they were already planning on giving away their home or other assets.

Before implementing any of these strategies, go see an attorney who specializes in Medicaid Planning to protect assets from nursing home costs to make sure that it’s the best thing to do in your situation.