Real Estate Transactions in Elder Law : To Transfer or Not to Transfer Property
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Real property frequently comprises the largest asset in the portfolio of an individual who consults with an attorney about elder law planning. More often than not, this property is the primary residence of the client and other family members. Clients or their children will ask the attorney whether they should give the house to the children so that the nursing home doesn’t ever get it. They ask this because their neighbor told them that this is what they should do, or because one of their children’s friends heard somewhere that you need to do this. There is never a “simple” answer to the inquiry, for one size doesn’t fit all when it comes to elder law planning.
The information herein presumes that there is someone with legal authority to transfer the real estate by gift. If the elder no longer has the legal capacity to do so, there must be a valid Durable Power of Attorney with gifting powers that are sufficient to accomplish the specific transfer in question. If there is no Power of Attorney, consideration must be given to seeking legal Guardianship and obtaining court authorization to make the transfer.
If you are thinking about a real estate conveyance in the elder law context, you need to consider:
- The impact on the elder’s legal right to remain in the home
- Which legal rights in the property will be lost, and which ones retained?
- Is there a safer alternative than an outright transfer, such as creating a different form of ownership?
- The impact property ownership or conveyance will have on a Medicaid application for either at-home or nursing home institutional services
- Is the conveyance a gift, and if so, of what value?
- What will be the Medicaid transfer penalty?
- Is this the right time to do the transaction?
- Is this property interest a countable resource or an excludable resource for Medicaid purposes?
- Does this property interest entail an income stream which is countable for Medicaid purposes?
- The impact on income taxes of both transferor and transferee.
- Will any tax benefits be lost, and will the transferee acquire income tax obligations such as capital gains taxes that can be avoided?
- The impact on the elder’s financial and practical ability to remain in the home
- Will the elder’s practical ability to remain in the home be in jeopardy due to a shortage of liquid assets and the loss of the ability to draw out the equity in the home via such vehicles as a reverse mortgage?
- The impact on the elder’s estate plan.
- Will this transfer disrupt the elder’s testamentary plan, by disproportionately shifting assets, e.g., to one person although the elder wants a group of people to share the estate equally?
- The impact of present and future items and mortgages
- Will this transaction cause existing mortgages to be called? Will it remove the risk of a future Medicaid lien?
The Impact on the Elder’s Legal Right to Remain in the Home
You need to think about whether the elder’s legal right to remain in the home would be in jeopardy if anything happens to the transferee. There are risks to consider. For example, what would happen if:
- The person who becomes the owner of the house doesn’t live there, and has to file for bankruptcy.
- The new owner (with or without a spouse) doesn’t want the elder(s) to stay there any more, or wants to sell.
- The new owner is sued and his/her interest in the house is attached by creditors.
- The new owner dies and the house passes through his/her estate to new owners, or must be sold to pay inheritance taxes.
- The new owner gets divorced and must provide property for equitable distribution.
Reduce These Risks by Reserving a Life Estate
While “protecting” the full value of the home for the new owner, outright transfer of one’s entire interest in the primary residence creates substantial legal risk should any of the above situations occur. These risks can be reduced by considering an option such as a transfer with a retained life estate.
What this means is the transferee (usually the child) would receive a “remainder interest” in the property subject to the life estate of the transferor (usually the elder parent ). The property couldn’t be sold during the life tenant’s lifetime without his or her joining in the Deed. Along with having the beneficial use and enjoyment of the property, the life tenant would also retain the legal obligation to pay for repairs, maintenance, taxes and the like on the property, and has the right to receive the rents if any.
Anyone succeeding to the rights of that remainderman (life tenant) would also have an interest which is subject to the life estate. If the property were sold, the life tenant and the remainderman would each receive a pro rata share of the sale proceeds.