Estate Planning & Elder Law FAQs About Real Estate

Real estate transactions can be complicated and are almost always an emotional ordeal. When dealing with aging family members, new complications can arise when buying a home or other real estate property. The lawyers at Farrell & Pak PLLC, who specialize in elder law and estate planning, provided the following Frequently Asked Questions about real estate transactions in regard to protecting the estate of elder home owners and their families.

Estate Planning and Elder Law FAQ’s About Real Estate

Q: What is a “Lady Bird Deed”?

A: A “Lady Bird Deed” is a deed in which the grantor reserves a life estate and also reserves the power to sell the property. Essentially, it is a revocable deed that transfers title to the grantee only if and when the grantee survives the grantor. Another name for it is “Enhanced Life Estate Deed.”

 

Q: Why would I want a Lady Bird Deed?

A: At present, the most common use of a Lady Bird Deed is to prevent sale of the property by the Medicaid Estate Recovery Program to recover the cost of Medicaid benefits of the grantor. It works because Medicaid estate recovery can operate only against the probate estate, and this kind of deed causes the property to pass outside the probate estate. And in the Medicaid context, there is no transfer penalty (penalizing gifts made by a Medicaid applicant) because the interest given to the grantee has no market value—nobody would pay a dime for it, because the grantor can revoke it at any time.

 

Q: Would a Lady Bird Deed have any benefit for a person who never qualifies for Medicaid?

A: Even if Medicaid is not an issue, a Lady Bird Deed can be used simply to avoid the delay and expense of probate. Such deeds have been used for many years for that purpose, thus earning the name “poor man’s will.”

 

Q: What is the effect of signing a “Lady Bird Deed” on property tax and capital gains tax?

A: As with any other deed reserving a life estate, a Lady Bird Deed does not affect the over-65 property tax exemptions, the school tax freeze or the right to defer property taxes; and there is a “step-up in basis” at the death of the grantor, so there is no capital gain tax on the increase in value of the property during the grantor’s lifetime.

 

Q: I’ve heard that Texas now has a law providing for a “Transfer on Death Deed.” How is that different from a Lady Bird Deed?

A: The two types of deeds have identical effects for most purposes—but not all. Sometimes one has a significant advantage over the other. The best way to determine which is best is to describe your particular situation to an attorney familiar with both types of deed.

 

Q: When a married person applies for Medicaid, why do they often deed the home to the spouse who is not applying for Medicaid?

A: This is another way of avoiding Medicaid estate recovery after a Medicaid beneficiary’s death, while protecting the spouse who is not on Medicaid. The non-Medicaid spouse signs a will providing if he or she is the first spouse to die, the home (and usually, everything else) goes into a trust for the spouse on Medicaid. The Medicaid benefits of the surviving spouse are not affected, and at the death of that spouse, what is left in the trust goes to the children (or to whoever the spouses agree should have it). If the Medicaid-eligible spouse dies first, probate is avoided, because the surviving spouse already owns everything.

 

Q: When can a Medicaid applicant own real estate and still qualify for Medicaid?

A: A home to which a Medicaid applicant intends to return is exempt from counting against the Medicaid asset limit (which is only $2,000 for an unmarried person but much more for a married couple with only one spouse applying). For an unmarried person, the value of the home that can be exempt is limited to $560,000 in equity (in 2017); but if the spouse of a Medicaid applicant lives in the home, there is no limit on the value that is exempt. In addition, a Medicaid applicant can own “business property”—usually a farm or ranch–of unlimited value.

 

Q: Will a revocable living trust protect the home of a Medicaid beneficiary?

A: With one exception, a deed transferring a home into a revocable trust actually removes the protection of the Medicaid homestead exemption. The exception is a Lady Bird Deed (or Transfer on Death Deed) which is not a problem because the interest owned by the trust has no market value.

 

Q: Why would I want to transfer a home to a trust as grantee of a Lady Bird Deed or Transfer on Death Deed, rather than simply naming an individual as the grantee?

A: Making a trust the grantee has two potential advantages over having individuals as grantees: (1) if there are two or more ultimate beneficiaries, the trustee can sell the property and divide the proceeds without the beneficiaries having to agree on the terms of sale; and (2) a trust can say who gets the interest of a grantee who dies before the grantor—providing, for example, that such an interest goes to the descendants or spouse of such a grantee.

 

Q: If I sign a living trust to avoid probate, is there anything else I need to sign?

A: In addition to the trust instrument, you need to sign the following: a deed to each parcel of real property you own; new account agreements with your bank, credit union, brokerage and other financial institutions retitling accounts (except retirement accounts) in the name of the trust; a document transferring all your tangible personal property into the trust; a Certificate of Trust to be recorded in the records of each county in which you own real property; and a “pour-over will” to put into the trust anything you own at the time of death that you did not put into the trust.

 

Q: Do living trusts really avoid probate?

A: Hardly ever, because most people don’t sign all the documents necessary to put everything they own into the trust. Therefore, those “pour-over wills” usually have to be probated.

 

Q: If I qualify for Medicaid in a nursing home and still own my home, how can I pay the taxes, insurance and other maintenance on the home?

A: The simplest solution to this problem is to “rent” the home to a tenant who will pay just the property tax, property insurance, maintenance and other tax-deductible expenses. If payment is made directly to providers (for example, to the tax assessor-collector and insurance company), there is no “income” that would have to be paid as a Medicaid copayment to the nursing home; and the property is maintained until you either go home or it passes to the grantees of the Lady Bird Deed.

 

Q: But what if there is a mortgage on my home?

A: Within each mortgage payment, a certain amount is interest and the rest is principal. If a tenant makes mortgage payments, the amount of each payment that is principal counts as “income” under the Medicaid rules. Therefore, that amount must be paid to the nursing home as copayment. Since the same dollar can’t be paid both to the lender and to the nursing home, somebody in the family—usually the grantee(s) of the Lady Bird Deed—must pay the principal to the nursing home each month.

 

Q: If I need long-term care, how and why would I use the equity in my home to pay for my care?

A: For home care, you can get a reverse mortgage line of credit. At the same time, you can also have Medicaid home care benefits, because the line of credit is not a Medicaid “resource” and the draws on the loan are not “income.” Alternatively, you can sell your home and use the proceeds to pay for care in an Assisted Living Facility or nursing home. For example, that could allow you to live in a really nice Assisted Living Facility that does not take Medicaid. For more ideas on this, go to https://www.payingforseniorcare.com/longtermcare/resources/reverse_mortgages.html

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