One of the most frequent questions I am asked by my estate planning clients is what they should do with their home? The main concern is usually protecting their house if they go into a nursing home. I first wrote about this a couple of years ago and with this blog post I want to provide more information about the various options and their advantages and disadvantages.
Before making any decision about estate planning and what to do with your home you should always speak with an attorney and give them all the unique facts about your situation. The facts can make a very significant difference on what is right for your situation. For example: Are you 65 years old or 80 years old? Do you have other significant assets besides your house? The answer to these and a host of other questions are needed to determine what option is best for you.
The Options — What should you do?
1. File a Homestead! Whenever I speak with someone about their home the first thing I ask is do you have a homestead filed on your house. Always – Always make sure you have a valid homestead on your home. If you are not sure, check with an attorney. If you have not filed a homestead make sure you file a homestead. Having a homestead filed on your house is one of the best things you can do to protect up to $500,000 in equity. For more information on Homesteads see my previous blog post “The New and Improved Homestead Law in Massachusetts: Ignoring This Could Devastate Your Financial Health.”
2. Do nothing? Sometimes the best thing to do is not to do anything at all. If your home is your most valuable asset you may not want to do anything which would transfer your ownership interest in your home to others and thereby reduce your ability to control your major asset. If you are in your 60s or 70s, healthy with few other assets, transferring your home to your son, daughter or even an irrevocable trust (see below) may not be a good idea. If you do transfer your home to your children and the transfer occurs more than 5 years before you enter a nursing home, under current law your house cannot be used to pay for nursing home care. However, if you transfer your home to your son or daughter and they file for bankruptcy or get divorced you may be in trouble. (Note: You have no idea about the real financial situation of any person unless you see their bank statements and balance sheet.) If your home is your major asset and you are relatively young (65 v 85) the best option may be to keep your home in your name.
3. Transfer 100% Ownership Interest. The extreme option compared to doing nothing is to transfer your home to someone else (commonly your adult children). The advantage of this is that you would avoid probate when you die. Another significant advantage is that this would protect your home from nursing home costs if the transfer occurred more than 5 years (current law) prior to applying for Mass Health . However, there are several disadvantages. You would lose complete control over your home. If your children decide to sell the house you do not have the legal authority to stop them. If a child who you transferred the house to files for bankruptcy the bankruptcy trustee could force the house to be sold. If a child files for divorce then the house may be listed as a marital asset subject to the terms of a divorce separation agreement you have no control over.
Even if none of the above bad things happen, transferring your house to someone before you die can have significant income tax consequences when the home is sold. If you transfer the home when you are alive this will be considered a gift and the recipient would then have your basis in the house. If you bought your house 30 years ago and paid $50,000 for the house your basis in the house would be $50,000 (the basis may increase some if you made major improvements and kept all your records but for the purpose of this example I am ignoring any other ways that your basis could be increased). If you give the house to a child, the child gets your basis. If the child sells the house for $450,000, he or she would have a capital gain of $400,000 ($450,000 sales price less your $50,000 basis = $400,000 gain) and the capital gains tax would be $60,000 (at 15% capital gains tax rate). If you owned your home when you died and it passed to your child, your child gets an increase in the basis of the home to the value of the home on the day you died. In the above case, if the house was worth $450,000 on the day you died and your child sold the home for $450,000 then there would be no gain – and zero tax liability. Thus, transferring your home to your child before you die may avoid probate, but in the above example would increase the tax liability on the sale of the home by $60,000.
4. Transfer Ownership but Retain a Life Estate. You can also transfer your home to your children but retain a life estate in your home. With a life estate you have the legal right to live in your home until you die. Transferring your home but retaining a life estate will also avoid probate and importantly, because you own an interest in your home when you die, your children will get an increase in the basis to the value on your date of death. If the transfer is made more than 5 years before you go into a nursing home, the value of what was transferred is protected from the nursing home.
If the person who you transfer your home has financial problems or gets divorced their partial ownership in your home could create problems. However, with a life estate you are in a better position compared to an outright transfer of your home because you have some protected rights as the legal holder of a life estate. A transfer with a retained life estate is an option that is between doing nothing and an outright transfer of ownership to someone else. You transfer ownership but retain the legal authority to live in your home. However, without full ownership you cannot sell your home or obtain a mortgage without the consent of the other owners of the home. Thus you give up control.
5. Transfer Your Home to Revocable Trust. If you transfer your home to a revocable trust (a revocable trust is one you can change at any time so long as you are competent) you can also avoid probate. The person who ultimately receives your home should get an increase in the basis to the value of your home when you die which should reduce their income tax liability when the home is sold. However, transferring your house to a revocable trust does NOT provide any protection of your home if you need to go into a nursing home. If you have your home in a trust and need to go into a nursing home then the value of your home will be included in determining your Mass Health eligibility. If you own your home in your own name, the value of your home of up to $750,000 is excluded when determining your Mass Health eligibility (note – the fact that your home is not considered in determining your eligibility for Mass Health does NOT mean that a lien will attach to try and recoup any payments Mass Health makes for your care). If you have your home in a trust and need to go into a nursing home under current law you can transfer your house back into either your name or preferably the name of your spouse if they are alive.
6. Transfer Your Home to an Irrevocable Trust. The last option I will discuss is to transfer your home to an irrevocable trust. The terms of the irrevocable trust can give you the right to live in your home as long as you are alive. If drafted properly, an irrevocable trust can protect your assets if you have to go into a nursing home. The same 5 year rule on the transfer applies – if the transfer to the irrevocable trust occurs within 5 years of you applying for Mass Health assistance for nursing home costs, the value of the assets transferred to the irrevocable trust are considered when determining your Mass Health eligibility. A very important point is that to obtain the asset protection you must NOT HAVE ANY CONTROL over the operation of the irrevocable trust. Simply put, you are giving your assets to the trust without any future control. If you have the ability to invade the trust, then those assets in the irrevocable trust will be considered available to pay for nursing home costs. If you have the right to income from the trust but not to invade the underlying principal, then the income must be used to pay for the nursing home but the underlying principal is protected from nursing home costs.
When structuring your estate plan there are several options to consider when deciding what to do with your home. The above discussion is based on current law and certainly will change. You should always discuss your specific situation with an experienced estate planning attorney to determine what is right for you. If you don’t have an attorney to work with, I would welcome the opportunity to meet with you for a no cost initial consultation.