Question:
I am 75 years old and widowed. I have three children and five grandchildren. I want to make sure my assets ( when I die ) go to my children and not the State or Federal Government. What is the “ Five Year Rule” regarding Medicaid and determining if the State pays for Nursing Home Care?
Answer:
When an elderly person qualifies for Medicaid assistance due to both need ( Nursing Home Residence ) and finances ( less than $2000 in countable assets ), the State will inquire if the elder person has transferred assets for less than full value within the prior five years. This five-year rule period does not begin for this elder person unless and until either:
- A Gift has been delivered to the recipient ( Donee ) without conditions or restrictions. This may not be desirable for the elder person for the following reasons:
- The tax basis to the recipient will be exactly the same as the tax basis of the elder person. By way of example, if the elder person transferred a rental real estate property ( purchased 10 years ago at a cost of $100,000 ) to his son, the son would now have the same tax basis as the father had. However, since it is rental property , this tax basis would have been lowered each year by depreciation. If we assume total depreciation over this ten year period would $30,000, the new tax basis would be $70,000. If the son sells the rental property ( when he receives it ) for its current value of $300,000, the son will be responsible for $230,000 in capital gains income on his next tax return.
- However, if the elder person established a MEDICAID ASSET PROTECTION TRUST ( MAPT ), therein granting the same rental property to the son upon father’s death, the son would receive the same property with a new ( STEPPED UP ) tax basis of $300,000. If son then sells the property for the $300,000, there would be no taxable gain.
There are, however, limitations placed on the elder person in creating the MAPT among which are:
- Naming an Independent Trustee ( not himself or his son or other immediate family member ( see IRS 672 ( c ) ).
- The Elder Person will surrender his rights to the Principal Assets in the Trust and only retain an interest in the earnings of the Trust.
- In order to examine carefully whether or not an MAPT is right for this Elder Person, he should meet with an Elder Law Attorney familiar with MAPTs.