My mother has a home (value approximately $300,000) and no money in savings. She is using many state-funded benefits (food stamps, energy assistance, Medicaid) to supplement what her Social Security does not cover on a monthly basis. My brother and I are trying to determine if selling her home and moving her to a smaller, less expensive home would help but we realize that once the house sells she may lose some or all of these benefits because she would then have money in the bank. Is the right thing to do to move her home in our names (but then we would have to pay capital gains once it sells) or to a trust before selling it so that it is out of her name? She won’t be able to survive without these state benefits, regardless of an increase in her savings.
Your mother is subject to the miserliness of public benefits in our country. Many programs are only available for individuals who keep their savings below $2,000, a threshold that has not changed since 1984.
There are a lot of factors for your mother to consider in deciding whether to sell her home or to transfer it or some of the proceeds of its sale to you and your brother or into trust.
First, you are right. If the house is transferred to you and your brother and then you sell it, you will have to pay taxes on any capital gain. If your mother keeps the house and sells it herself, she can exclude the first $250,000 of gain from taxation. So, it probably does not make sense to transfer the house to you and your brother if the plan is to sell it.
Second, there are other possible drawbacks to such a transfer. The house or the proceeds of its sale would be subject to claim if either you or your brother were sued and potentially if you entered divorce proceedings. Further, your mother would lose some autonomy since she would be dependent on you for her home and possible access to her cash.
Third, such a transfer could make your mother ineligible for benefits for a period of time. To make things complicated, each program has its own rules, and sometimes the rules differ depending on the circumstances. For instance, some state Medicaid programs do not impose a transfer penalty as long as a beneficiary is living in the community but do if they move to a nursing home.
Fourth, a trust may make sense, but the typical trust used to protect homes must be irrevocable and it must bar distributions to the person creating it. So, if your mother transferred her home to a trust and then it was exchanged for a less expensive house, she would not have access to cash that would be generated. This is an argument for transferring the house or the excess proceeds directly to you and your brother to hold for your mother despite the drawbacks described above.
Finally, if your mother is disabled she may be eligible for one of two “safe harbor” trusts that permit her to shelter assets and still benefit from them. For one of these trusts, she must be under age 65. The other, a so-called (d)(4)(C) or “pooled disability” trusts, she may be eligible after age 65, but that depends on state options. As you can see, these issues are very complicated and the best plan depends on a mixture of your mother’s situation, the specific benefits she receives, and how various laws are applied in your state.
To determine the best approach it makes sense to consult with a local elder law attorney.
Harry S. Margolis practices elder law, estate and special needs planning at Margolis Bloom & D’Agostino in Boston and Wellesley, Mass., and is the founder of ElderLawAnswers.com. He is author of The Baby Boomers Guide to Trusts: Your All-Purpose Estate Planning Tool and answers consumer questions about estate planning issues at www.AskHarry.info.