What are the benefits and drawbacks of having our home in an asset protection trust? We are 60 and 53 years old.
It sounds as if you’re considering a specific type of asset protection trust — a Medicaid trust.
Eligibility for Medicaid nursing home benefits is based on financial need. But your house is an exempt asset: its value isn’t deemed available to pay for your care as long as you and your spouse are alive. After your deaths, however, Medicaid can assert a claim on the house to recover what it spent on your care. You can prevent that possibility by transferring ownership of the house to a trust. A transfer done at least five years before you need Medicaid nursing home benefits won’t delay your eligibility.
You give up legal title to the house when you put it the trust; but you can keep the right to live there. You can change the trust beneficiaries if you want. And although you can’t remove assets from the trust, you can exchange them for others of equivalent value, says Lawrence Davidow, an Islandia elder law attorney. For example, the trust could sell your house and use the proceeds to buy you a condo. And you still own the house for income tax purposes, he adds — so the sale proceeds would qualify for the capital-gains tax exclusion on the sale of a primary residence.
The main drawback of this strategy is that most banks are unwilling to give new financing on a house that’s in an irrevocable trust, says Davidow. After the transfer, it is very difficult to remortgage the house, get a reverse mortgage or a new home equity loan, or draw on a current home equity loan.
THE BOTTOM LINE
A Medicaid trust can preserve your house for your heirs.