As a general rule, you are not permitted to give away your assets for the sole purpose of qualifying for medical assistance. You are permitted, however, to give away your assets if there are other reasons for doing so. For example, in order to avoid probate, you want to deed your home to your children but retain your right to live there as long as you want to live there. In this situation, you will own what is called a "life estate" and your children will own the "remainder" interests. This is a permissible gift and you get the benefit of being able to protect at least part of the value of your home from medical assistance (most typically nursing home expenses).
The government's asset transfer rules are complex and keep changing. For those who transfer assets for no value or for something less than fair value, Congress has established a period of ineligibility for Medical Assistance (Medicaid).
There is presently a "look back" period of five (5) years on assets transferred after Feb. 8, 2006, seven (7) years if the transfer is to a trust. The State will look back at those transfers and decide if they were made for less than fair value and for the purpose of qualifying for Medical Assistance. If you made transfers for less than fair value and for the purpose of qualifying for medical assistance, you will be penalized and your medical assistance eligibility may be delayed.
CAUTIONS: If you transfer your assets to your children:
- If you wish to sell or mortgage your property, it may be awkward because all of your children and their respective spouses must also sign the deed or mortgage.
- If you sell the property during your lifetime, your children will receive part of the sale proceeds and they will have no legal obligation to return any portion of it to you.
- If any of your children have a judgment or tax lien it may well attach to their remainder interest. This will usually mean that the judgment or lien must be satisfied before the property can be sold or mortgaged, resulting in a loss to your child or children. It is also possible that the judgment creditor will be able to force the sale of the property if it is not your homestead. If a child later develops financial problems and files for bankruptcy, he or she will lose his or her remainder interest.
- If any of your children have marital problems which end in divorce, their remainder interest may figure in your child's property settlement and may pose a problem.
- In the event of a sale of the property before your death, if there is a taxable capital gain, your children will have to pay income tax on a portion of the gain (capital gains tax) that is calculated based on their proportion of ownership interest and according to their income tax brackets. Owners who reside on the property as their homestead may receive favorable tax treatment only as to their proportionate share of ownership.
- If any of your children die before you, it will be necessary to probate that child's interest in the property. It is entirely possible that the remainder interest owned by your deceased child will go to his or her surviving spouse, if married. This will require some special effort to have the surviving spouse transfer the property to your grandchildren, and the surviving spouse may not be willing to do so. If you choose to avoid such possible probate by structuring the remainder interests among your children as joint tenants with right of survivorship instead of as tenants in common, a deceased child's interest would go to the other siblings and his or her children may be totally omitted from sharing in the property. If you choose to structure the remainder interests among your children as tenants in common, each child's interest will be a part of his or her estate and will be subject either to the intestacy (dies without a Will) rules or the provisions of his or her Will.
- In the event of a sale of just your life estate or a sale by just one of your remaindermen (children), you will run into the so-called "term interest" rule which means that no income tax basis is allowed on the sale and the entire sale price is treated as taxable gain.
- If, at a later time, you want your children to give back their remainder interest, you will probably find that it will have a harmful effect on your children because the gift back to you will may be regarded as a future interest and therefore, part of their unified credit will be lost (lower the amount of the exclusion from estate taxes for your child in his or her estate). This may have a harmful effect on your children's estate tax situation (taxable estate) at the time of their death.
- When you create a life estate, a gift (an uncompensated transfer) is automatically made to your children of the remainder interest. This gift disqualifies you for medical assistance (help with nursing home and other medical bills) for a period of time, currently five (5) years if the gift is not in trust and seven (7) years if the gift is placed in a trust. Sufficient cash assets must be reserved to pay for nursing care during that time. The Minnesota Department of Health as well as Federal Law determines the period of ineligibility for medical assistance.
- If you proceed with the life estate transaction, contact your casualty insurance agent and notify it of the change in ownership because all owners will have some liability exposure. You should name your children (the remainder interests) as additional insureds on hazard and liability insurance for the property.
- If you are transferring the gift to a number of children, consider their ability to communicate and cooperate in the handling of regular maintenance expenses, real estate taxes, etc., after your death Such cooperation may be difficult depending upon the personal relationships between the children and the number of children involved.
- When applying for medial assistance you must disclose this life estate in the property and remember that only a portion of the property will be shielded from a medical assistance lien.
- There may be negative tax consequences if you later transfer your life estate or if your children transfer their respective interests separately.
- The fact that your adult children are holding your assets in their names could jeopardize your grandchildren's eligibility for financial aid for college or other higher education.
Always discuss your options with an experienced elder law and estate planning attorney before doing anything.
More Information on Minnesota Estate Planning