It has been said that you cannot have your cake and eat it, too. This phrase often represents the idea that a person cannot have two incompatible things at the same time.
The struggle between incompatible goals is exemplified when people plan for long-term care (nursing home, assisted living and/or in-home healthcare).
Many people will simply give their stocks, bonds and real estate to their children, so that the parents can then be eligible for Medicaid (by having a net worth of less than $2,000) after five years, so that Medicaid will pick up the long-term care bill thereafter.
The struggle with that plan comes from capital gains taxes. There are only two primary ways to avoid capital gains taxes on the increase in value of stocks, bonds and real estate when those assets are sold.
First, if the asset sold is a person’s primary residence, the person can usually avoid capital gains tax on most/all of the gain from the house’s sale.
Second, if someone dies owning an asset that would be subject to capital gains tax, the gain is only measured from the value at the date of death, not from the purchase value.
In other words, if I want my kids to receive a farm or a building and be able to sell it without capital gains tax, I should die owning that asset. In such instance, as long as my kids sell the asset for the appraised value at the time of my death, my kids will completely avoid capital gains taxes.
But, if I give my house, my farm, my stock or my bonds to my kids while I am alive (as is many people’s default plan), my kids will have to pay capital gains tax on the difference between the sale price of the asset and what I paid for that asset many years (perhaps decades) ago.
This demonstrates the conundrum. I want assets out of my name so I can be eligible for Medicaid. However, I want to keep assets in my name until I die so my heirs avoid capital gains tax if/when my heirs sell those assets.
How do I get both seemingly incompatible things? I use a Medicaid-compliant trust.
A Medicaid-compliant trust retains my assets’ character as being owned by me for tax/IRS purposes. Simultaneously, though, the terms of the trust remove much of my direct/immediate power/control over the assets in the trust. The lack of direct power/control makes the asset “uncountable” for Medicaid purposes. There is still a five-year lookback period, but future capital gains taxes can be minimized/eliminated.
There are other, similar tools, such as life estates with LLCs owned by heirs, used in Medicaid planning. However, those structures are almost always subject to post-death liens from Medicaid. Attorneys strenuously try to avoid those liens against assets after death, but the Medicaid rules are strongly worded to recover at least a portion of the value of assets in a life estate, even if (regardless of whether the asset is) eventually owned by an LLC.
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.