Q. Our mother is in assisted living and may need to go into a nursing home soon. To raise money for her ongoing care, we are thinking of selling her home which is now vacant. Any thoughts as to whether that makes sense?
A. Well, here’s the thing: selling mom’s home may undermine her ability to qualify for a government subsidy to help pay for the cost of care, whether in the Assisted-Living Facility (“ALF”) now, or later in a nursing home. Reason: once she receives the sales proceeds she will then likely be “over resourced” and not eligible for government subsidies to help with the cost of her care.
Background: There are two principal government programs designed to help subsidize the cost of long-term care: (1) the Veterans Pension Program, which works best for wartime veterans or their spouses receiving care in a home or ALF setting, and the (2) Medi-Cal Long-Term Care (“LTC”) program. While the Medi-Cal Program was originally designed to subsidize care in a nursing home setting, more recently — because of the Affordable Care Act and California initiatives — it has been expanded to subsidize care at home under its “Home and Community Based Services” (“HCBS”) programs. It is also experimenting with coverage for a limited number of qualified residents at some ALF’s under so-called “waiver programs”. In this context, the word “waiver” refers to Medi-Cal ‘waiving’ the traditional requirement that care be received in a nursing home setting. However, both the VA and Medi-Cal programs currently have resource ceilings, and individuals with countable assets which exceed those ceilings will not qualify.
Were you to sell mom’s home while it remains in her name, the sale proceeds would likely cause her to exceed those resource ceilings. She would then be ineligible for benefits under both the VA and Medi-Cal programs, and would then be obliged to rely upon those home sale proceeds, alone, to pay the full cost of her care. Over time, those funds would be gradually spent down at a more rapid rate and, depending upon her longevity, even exhausted.
Often a better approach would involve the creation of a very specially designed Irrevocable Trust, which I sometimes call a “House Trust ”. This trust is different from the more common “Living Trust”, and is designed to preserve home sales proceeds in the Trust, while also permitting qualification for government subsidies to help with the cost of care. It only works where the Trustee and all beneficiaries are 100% trustworthy and are prepared to put mother’s interests first.
By this approach, your mother’s home would first be transferred into this ‘House Trust’, and only then would it be sold. The Trustee would then distribute funds periodically to the trust beneficiaries, who would then – in turn– use them to help with mother’s expenses. Because of its special features, this trust:
(1) would permit the sale of the home in order to raise cash for her care;
(2) would not undermine her eligibility for subsidies under either the Veterans Pension Program or the Medi-Cal LTC program, as the sales proceeds would then officially be “owned” by the Trustee;
(3) would permit the Trustee to indirectly use the sales proceeds to help pay for mom’s care expenses, by authorizing periodic distributions only to the trusted beneficiaries (i.e., mom’s children), who would then, in turn, “gratuitously” use them to help pay for mother’s expenses to the extent of her need, after taking into account any available government benefits. Essentially, they would make gifts to the providers of mom’s care, and may need to file simple Gift Tax Returns each year;
(4) would preserve her eligibility for the $250,000 capital gains tax exclusion associated with the sale of one’s own personal residence, notwithstanding her transfer to the Trustee prior to sale!; however, your mother may still have a capital gain which exceeds this exclusion, so you must evaluate her overall tax liability in the event of sale before opting for this strategy; sometimes there are other options in lieu of sale, such as a Private Reverse Mortgage; and
(5) if your mother died while the home were still in the Trust, it would — under current rules — still receive a favorable “step-up” in tax basis, so that it would then go to her designated beneficiaries with a minimal tax burden, or perhaps none at all!
The result: Mother’s eligibility for government care subsidies is preserved, and she thereby avoids reliance upon the home sales proceeds, alone, to pay for her care. Indeed, this plan may enable her to have more funds available to improve the quality and increase the hours of her care. Further, by slowing the depletion of her own resources on care expenses, the plan may also preserve more of her estate for her children down the road or, perhaps, even for her own use should she later recover.