Among several requirements, to be eligible for Medicaid, a person must have a financial net worth of less than $2,000 and must not have given anything away to become that poor within the five years before application. Of course, Medicaid eligibility means that the government will pay for a person’s long-term care, including nursing home care or in-home care.
The five-year lookback does not mean that a person’s planning is useless if the person is already in a nursing home or if the person is admitted to a nursing home within five years of the nursing home planning. And, long-term care/asset protection plans that are undertaken early almost always help later, even if five years have not elapsed since the plan was put into place.
Often, retired parents will want to simply “give” their assets to their kids and hope that the parents do not need long-term care within the next five years. Gifting is entirely lawful and is usually not taxable at the time when the gift is made.
However, if real estate (and certain other assets) is given away while the gift giver is alive, the gift receiver may face a significant capital gains tax liability if the asset is later sold. For this reason, giving real estate away to become poor enough to be eligible for Medicaid is often not advisable.
However, if a person owns real estate when the person dies, the receiver of the inheritance can often avoid capital gains tax when selling the real estate.
So, the catch 22 is that you cannot own valuable real estate and be on Medicaid, but if you give away valuable real estate to be eligible for Medicaid, the receiver of the valuable real estate may eventually have capital gains tax liability when the real estate is sold.
Under current Ohio law, planning for long-term care in advance is relatively easy when the asset to be protected is real estate. The tool that the Ohio Administrative Code specifically allows people to get the best of both worlds is a restricted, retained life estate. This tool can allow a person to own real estate with that real estate not being a “countable asset” when determining a person’s net worth as to Medicaid eligibility.
A life estate is similar to a life lease. A person with a life estate owns real estate until the person dies, at which time, ownership automatically goes to someone else. If the life estate that is created in a deed explicitly and specifically prohibits the life estate owner from selling or transferring the property, Medicaid will not impute (imagine and assess) a value to the life estate.
In order to decrease or eliminate capital gains tax, it is crucial that the life estate holder own the property in its entirety before creating the life estate. In other words, the life estate must be “retained” in order for the IRS to allow the receiver to avoid some or all capital gains tax when the real estate is sold.
Lee R. Schroeder is an Ohio licensed attorney at Schroeder Law LLC in Putnam County. He limits his practice to business, real estate, estate planning and agriculture issues in northwest Ohio. He can be reached at Lee@LeeSchroeder.com or at 419-659-2058. This article is not intended to serve as legal advice, and specific advice should be sought from the licensed attorney of your choice based upon the specific facts and circumstances that you face.