Our country is experiencing a growing number of households in which a parent and an adult child reside together. Census data reveals that the number of Americans living in multi-generational family households is the highest it has been since the 1950s, with a significant increase in recent years. Parker, K., Pew Research Social & Demographic Trends: The Boomerang Generation (March 12, 2012), http://www.pewsocialtrends.org/2012/03/15/the-boomerang-generation. While this surge is partly explained by the “boomerang generation” of young adults returning home because of a difficult economic climate, it is also the result of seniors who are no longer willing or able to live alone.
When a widowed or single parent and an adult child consider residing together, the parties involved should consider the various Medicaid planning, tax and personal issues that may be impacted by that decision. Outlined below are various home ownership options available to a parent and adult child, as well as the potential impact that these arrangements may have on Medicaid, tax, and personal issues.
The impact of home ownership options on a parent’s Medicaid eligibility is often of primary importance. By way of background, Medicaid is a joint federal and state program created under Title XIX of the Social Security Act of 1965. It provides a source of funding for long-term care to those aged, blind and disabled individuals who qualify financially. 42 U.S.C. §1396 et seq.; N.J.A.C. 10:71-1 et seq. Eligibility for Medicaid is based upon financial need. For example, under the “Medicaid Only” program, an applicant’s countable resources cannot exceed $2,000.00. N.J.A.C. 10:71-4.4.
Following the enactment of the Medicaid program, based upon concern over the practice of purposeful asset divestiture to obtain Medicaid eligibility, Congress enacted legislation to impose periods of ineligibility, or “penalty periods,” in cases in which a Medicaid applicant divested himself of assets for less than fair market value in an attempt to render himself “needy.” See Rainey v. Guardianship of Mackey, 773 So. 2d 118, 119 (Fla. Dist. Ct. App. 2000); In re John XX, 652 N.Y.S.2d 329 (Sup. Ct. 1996), appeal denied, 659 N.Y.S.2d 854 (1997). This legislation initially imposed a 36-month “look-back period,” in which Medicaid officials would “look back” from the application date to analyze asset transfers by the applicant. Id. The Deficit Reduction Act of 2005 later extended the look-back period to sixty (60) months for all transfers that occur after the date of enactment. 42 U.S.C. §1396(p)(c)(B)(i). Consequently, if a Medicaid applicant disposes of assets for less than fair market value within the 60-month “look-back” period, the applicant may be subject to a penalty period, based upon the value of the uncompensated transfer. 42 U.S.C. §1396(p). The penalty period is calculated by dividing the amount of the uncompensated transfer (the gift) by the penalty divisor, which as of April 1, 2014 is $9,535.63. See http://www.state.nj.us/humanservices/dmahs/info/resources/medicaid/.
Medicaid considers real property to be an available resource, unless it falls within one of the exclusions set forth in N.J.A.C. 10:71-4.4(b). According to that regulation, a house occupied by the individual applying for Medicaid (or that person’s spouse) as his or her place of principal residence is excluded. However, the transfer of an otherwise excludable house (to someone other than the spouse), even if it serves as the parent’s primary residence, will be subject to the transfer of assets provisions. N.J.A.C. 19:71-4.10(b)(4).
Upon a Medicaid recipient’s death, federal law requires states to enact provisions to recover from the deceased recipient’s estate the funds expended on that person. In New Jersey, estate recovery is dependent on the date of death and the age at which benefits were paid, and is expansively defined to include not only the real and personal property and other assets owned at the time of death, to the extent of that interest, but also such assets “conveyed to a survivor, heir or assign of the beneficiary through joint tenancy, tenancy in common, survivorship, life estate, living trust or other arrangement.” N.J.A.C. 10:49-14.1(l)(2). However, “life estate,” for purposes of estate recovery, is defined as “a life estate created upon the death of a beneficiary.” N.J.A.C. 10:49-14.1(l)(2)(i).
It is against this backdrop that a widowed or single parent should consider the appropriate house ownership options when deciding to reside with an adult child.
HOME OWNERSHIP OPTIONS: TAX AND MEDICAID ISSUES
Outright Transfer to Child:
A parent may make an outright transfer (gift) of a home to a child. There are many disadvantages to this option. First, the parent will lose all rights to or control of the property. In addition, the parent must wait during the 60-month “look-back” period before applying for Medicaid; otherwise, the gift will be subject to a Medicaid transfer penalty.
Moreover, the parent will lose any applicable Homestead Tax Rebate and Senior Citizen’s Deduction. A gift tax return will have to be filed, and the child will lose the “step-up” in basis that would otherwise be available using other methods of transfer.
When the home is owned by a parent and adult child as joint tenants with right of survivorship, the house will pass upon the parent’s death by operation of law to the surviving joint owner (the adult child), without the need for probate.
For Medicaid purposes, the transfer of the interest in the home from the parent to the child is considered a gift, and will subject the parent to a Medicaid penalty if the parent applies for Medicaid within sixty months of the transfer. The value of the property is divided by the number of owners, and the parent’s share is counted as a resource. N.J.A.C. 10:71-4.1(d)(1).
Upon the death of the Medicaid recipient, the entire property is subject to estate recovery in New Jersey. N.J.A.C. 10:49-14.1(l)(2), m.
The total value of the property held by joint tenancy is normally included in the valuation of the transfer, for inheritance tax purposes, as if the property had belonged to the decedent absolutely, unless the survivor can show that the property originally belonged to him/her. N.J.S.A. 54:34-1(f).
Tenancy in Common:
If a parent and adult child own the home as tenants in common, the parent’s interest in the home will pass upon death according to the terms of the parent’s will (or by intestacy, if there is no will).
For Medicaid purposes, the transfer of the interest in the home from the parent to the child is considered a gift and will subject the parent to a Medicaid penalty if the parent applies for Medicaid within sixty months of the transfer. The value of the property is divided by the number of owners and the parent’s share is counted as a resource. N.J.A.C. 10:71-4.1(d)(1).
Upon the death of the Medicaid recipient, the parent’s one-half interest in the property is subject to estate recovery in New Jersey. N.J.A.C. 10:49-14.1(l)(2), m.
Transfer to “Caregiver Child”:
An effective tool for transferring a parent’s home to an adult child without the imposition of a Medicaid penalty is based upon the “caregiver child” exception to the Medicaid penalty rules. If a child has resided in the home for at least two years and has provided a level of care to the parent sufficient to keep the parent out of the nursing home for a period of two years or longer, the child will qualify as a caregiver. Title to the home can be transferred to that child without a Medicaid penalty. 42 U.S.C. §1396p(c)(2)(A)(iv).
The care provided by the child must have exceeded normal personal support activities such as routine transportation and shopping. The institutionalized person’s physical and mental condition must have been such as to require special attention and care. The care provided by the son or daughter must have been essential to the health and safety of the individual and consisted of activities such as, but not limited to, supervision of medication, monitoring of nutritional status, and ensuring the safety of the parent. N.J.A.C. 10:71-4.10(d)(4).
Upon the death of the Medicaid recipient, the interest conveyed is not subject to estate recovery.
A gift tax return must be filed for the transfer of the home to a caregiver child.
Transfer to Disabled Child:
A transfer of resources to a parent’s child who is blind or permanently and totally disabled is an exempt transfer, for Medicaid purposes. 42 U.S.C. §1396p(c)(2)(B)(iii).
Upon the death of the Medicaid recipient, the interest conveyed is not subject to estate recovery.
A gift tax return must be filed for the transfer of the home to a disabled child.
If the disabled child is under age 65 and is otherwise eligible for needs-based public benefits, the transfer can be made to a “Sole Benefit Of” trust (naming the State of New Jersey as first remainder beneficiary) to protect the child’s eligibility for needs-based public benefits. N.J.A.C. 10:71-4.10(e).
Life Estate with Retained Power of Appointment:
The parent can transfer his/her residence to an adult child, while retaining a life estate and a power to appoint the property to the child (alternatively, the parent can purchase a life estate in the child’s home). If the parent retains a life estate, he or she will retain control of the house during his/her lifetime, and will be responsible to pay taxes, make repairs, and pay interest on the mortgage. See Kruse v. Meissner, 136 N.J. Eq. 209 (E. & A. 1945). Upon death, the property will pass to the child.
If the parent retains a life estate and gifts the remainder interest in his/her home to the child, and then applies for Medicaid during the 60-month “look-back” period, the amount of the gift will be reduced by the value of the parent’s life estate (calculated according to the HCFA life estate table). N.J.A.C. 10:71-4.10(b)(6)(iii). Conversely, if the parent is purchasing a life estate in a home owned by the child, that purchase of the life estate will not be considered by Medicaid to be a gift (if the parent resides in the home for at least one year following the purchase), and it will reduce the parent’s countable resources. Id.
However, if the parent owns a life estate in the property and allows his/her adult child to reside on the property, failure by the parent to collect rent from that child could be considered a transfer of assets. See N.J.A.C. 10:71-4.10(b)(3) (transfer of assets shall include “income … which the individual is entitled to but does not receive because of action or inaction by the individual”).
The house will escape Medicaid estate recovery, because New Jersey provides that the term “estate” does not include “a life estate in which the beneficiary held an interest during his or her lifetime, but which expired upon the Medicaid beneficiary’s death.” N.J.A.C. 10:49-14.1(n)(1).
A gift tax return must be filed for the transfer of the remainder interest if it exceeds the annual gift tax exclusion, but there will be no federal gift tax due if the value of the interest, along with other taxable gifts, does not exceed the federal gift tax exemption. I.R.C. §2501 and 2505. (New Jersey has no gift tax.)
Because the parent is reserving a life estate and paying the real estate taxes on the property, the parent can deduct those taxes on his/her federal income tax return, I.R.C. §164(a); Reg. §1.164-1(a), and is entitled to continue to receive the applicable Homestead Tax Rebate and Senior Citizen’s Deduction.
The child will receive a step-up in cost basis to the real property’s fair market value (FMV) at the time of the parent’s death, which will provide favorable tax treatment when the home is ultimately sold.
Transfer Home with Use and Occupancy Agreement:
The parent can transfer his/her residence to an adult child, while retaining the right to use and occupy the home. This gives the parent a lesser right than the right to a life estate.
The parent must wait during the five-year “look-back period” before applying for Medicaid; otherwise, the gift will be subject to a transfer penalty.
In addition, the parent will lose the Homestead Tax Rebate and the applicable Senior Citizen’s Deduction.
HOME OWNERSHIP OPTIONS: PERSONAL ISSUES
In the best case scenario, a parent and child will choose one of these ownership options, will reside together successfully, and the parties’ mutual intentions will be given effect. However, unanticipated issues may complicate the best case scenario. By way of example, the following issues may arise:
- An adult child has become unemployed, and moves into the aging parent’s home. The child feels that her resulting care of the parent entitles her to the parent’s home upon death. However, siblings of the child view the arrangement as the child “freeloading” off the parent, and object to the possibility of that child ultimately receiving the parent’s house.
- The parent makes a deed transfer to her daughter and son-in-law. What happens if the daughter and son-in-law get divorced? What happens if the child has person debt or other financial issues?
- A parent purchases a life estate in the child’s home as part of a Medicaid plan. The parent unexpectedly dies very shortly thereafter. The child’s other siblings feel that the life estate purchase price should be shared among the children.
- A parent moves into the child’s home after a deed transfer, and it soon becomes apparent that the parties will not be able to successfully live together. Does the child still reap the benefits of the deed transfer?
- A father gifts an interest in the house to his son and daughter-in-law, who move into the home with him. Within the five-year look-back period, the father requires nursing home care.
These Medicaid, tax, and personal issues should all be considered in order to develop an effective plan for the parties involved.
(Donald D. Vanarelli, Esq., with offices in Westfield NJ, is a Certified Elder Law Attorney (by NELF, accredited by the ABA), an Accredited Professional Mediator and an Accredited VA Attorney. Mr. Vanarelli was named to the “Super Lawyer” list in years 2007 – 2014 and is a founding member of the Academy of Special Needs Planners. For more information, contact Vanarelli & Li, LLC, 908-232-7400 or visit his web site at www.vanarellilaw.com.)
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