Although you generally do not have to sell your home in order to qualify for MassHealth coverage of nursing home care (subject to certain home equity limits), MassHealth could file a claim against the house after you die or if your spouse moves out of the property. If you get help from MassHealth to pay for the nursing home, MassHealth must attempt to recoup from your estate whatever benefits it paid for your care. This is called "estate recovery." If you want to protect your home from this recovery, you may be tempted to give it to your children. Here are four reasons not to:
1. MassHealth Ineligibility. Transferring your house to your children (or someone else) may make you ineligible for MassHealth for a period of time. MassHealth looks at any transfers made within five years of the MassHealth application. If you made a transfer for less than market value within that time period, MassHealth will impose a penalty period during which you will not be eligible for benefits. Depending on the house’s value, the period of MassHealth ineligibility could stretch on for years, and it would not start until the MassHealth applicant is almost completely out of money.
There are circumstances under which you can transfer a home without penalty and each must be explored as part of any planning.
And no, "selling" your home for $1.00 to your children doesn't change a gift into a sale. MassHealth will simply calculate the difference between the value of the home on the date of the sale and the $1.00 paid and treat that as a disqualifying transfer.
2. Loss of control. By transferring your house to your children, you will no longer own the house, which means you will not have control of it. Your children can do what they want with it. Even if you are confident your children will always honor their moral obligation to let you live in the property, this moral obligation will not hold against third parties: if your children are sued or get divorced, the house will be vulnerable to their creditors.
3. Adverse tax consequences. Inherited property receives a "step up" in basis when you die, which means the basis is the current value of the property. However, when you give property to a child, you transfer your tax basis to the child and they lose any future step up. If your child sells the house after you die, he or she would have to pay capital gains taxes on the difference between the tax basis and the selling price. In addition, if during your lifetime after the gift to a child you decide to sell the house your children will recognize any gain on the sale of the property and won't be able to shield it using your primary residence capital gains exclusion (currently at $250,000 ($500,000 for a couple)).
4. Negative Impact of Child as Owner: Once the transfer is made your children are the owners. I've seen this negatively impact children in a variety of ways, including negatively impacting the amount of financial aide their grandchildren are eligible for because the house was listed on a FAFSA, and children not being eligible for first time home buyer loan programs (since they were already the owner of a home).
There are other ways to protect a house from MassHealth estate recovery, including putting the home in a trust. Contact us to find out the best option in your circumstances.