BENEFITS OF A PERSONAL RESIDENCE TRUST

HOW TO BEST PROTECT YOUR HOME IF NURSING HOME CARE IS EVER NEEDED

By: BENJAMIN D. ECKMAN, ESQ.

Elder Law Attorney

What are the benefits of a personal residence trust? Many senior citizens are concerned with the thought “what will happen to my primary residence if nursing home care is ever needed?” Married couples are afraid that if one spouse enters a nursing home, the other spouse (“the community spouse”) will have to sell the house. Widowed and single individuals are worried that if they enter a nursing home, they will lose the ability to transfer their house to their children or other loved ones. Fortunately, with proper planning, protection of the primary house is almost a certainty.

Many married couples own their homes jointly with one another. If one spouse enters a nursing home, the other may still continue living in the house. However, if the couple wishes to preserve the home for the family, planning must be done. Consider this frequent example: Husband has a stroke and needs permanent care in a facility. Wife can continue to reside in the marital home. However, if the wife predeceases her husband, the home, which had been owned jointly, will now pass entirely to the husband. Since no planning was done, the house will be sold, and such proceeds used to pay the husband’s nursing home costs.

When a widowed or single individual seeks governmental benefits, Medicaid requires that their available assets be below $2,000.00 before receiving assistance. Moreover, if a person enters a nursing home without a reasonable expectation of returning to the primary residence, Medicaid will insist that the home be sold and the proceeds used to pay for care. Some seniors believe that they can simply transfer the home to their loved ones prior to entering a nursing home. This is incorrect, as Medicaid examines all gifts made within five (5) years of applying for the program. Accordingly, such a transfer will result in a penalty period for which Medicaid will not cover nursing home costs.

THE SOLUTION: THE BENEFITS OF A PERSONAL RESIDENCE TRUST

Fortunately, various planning techniques still exist to protect the family home. “The Personal Residence Trust” is one of the most commonly used asset protection planning strategy. In this instance, the Grantor (homeowner) signs a Trust document and a new deed is also signed, re-titling the house in the name of the Trust. The Grantor retains the right to use and occupy the property for the rest of his/her life. This means that the Trust now owns the home, while the grantor retains the use and occupancy for the rest of his/her life. This transfer starts the look-back period for Medicaid. So long as the 5 year look-back period elapses, the primary residence will be protected from the nursing home.

From a practical perspective, the Trust assures the Grantor that little has changed. The Grantor (usually the parent) is still legally obligated to pay all expenses of regular maintenance, upkeep, and property taxes, and can deduct these items as well. The Grantor is entitled to exclusively occupy the premises, without fear of being evicted. Upon the parent’s death, the house in the trust is transferred to the trust beneficiaries, all in accordance with the parent’s wishes.

Medicaid Look Back Period

The transfer of the home to the Trust is a gift for Medicaid purposes. The five year look-back period starts when the deed is recorded with the county clerk. The look-back period is the time frame within which Medicaid can examine any and all gifts. For those who think they are healthy and will not need nursing home care within the next 5 years, a transfer of a house to a Personal Residence Trust can be a grand slam as the house usually is the most valuable single asset.

Tax Issues

What happens from a tax perspective as the Trust now owns the house?  The Grantor gifted an asset but retained the right to use and occupy that asset. This use and occupancy string pulls 100% of the home’s value into the Grantor’s estate. From an income tax perspective, if the property is sold during the Grantor’s lifetime, the Grantor will be entitled to the $250,000.00 capital gains tax exclusion, ($500,000 for married couples).

From an estate tax perspective, 100% of the value of the house is included in the Grantor’s estate, and the beneficiaries / children will receive a “step up” in basis on the death of the Grantor, equal to the fair market value at that time. For example, assume Mom bought the house for $40,000 in the 1960’s and it appreciates to $440,000 at the time Mom passed away. Mom’s estate includes the house valued at $440,000, and her heirs get the house with a $440,000 basis. Suppose they later sell the house for $450,000. They will pay capital gains tax on only $10,000.

Only if the total estate exceeds $675,000 (New Jersey) or $5,430,000 (Federal), will there be an estate tax. If there is a New Jersey Estate Tax, the top graduated rate is 16%; this is far less that the new capital gains tax rates that would apply if Mom simply gave the house to the children outright without creating the Trust.

New Jersey imposes an Inheritance Tax on beneficiaries who are not children. Assume, for example, Uncle establishes a Trust, naming his nieces and nephews as beneficiaries. Whereas the Estate Tax is imposed on the value of the decedent’s estate, the Inheritance Tax is assessed against a beneficiary based on their relationship to the decedent. Transfers to spouses and children are exempt, while transfers to other family members are not. When Uncle dies, the entire value is subject to Inheritance Tax. Thus, the nieces and nephews get the house, but will pay 15%-16% of its value to the NJ Division of Taxation. The Inheritance Tax is a credit to the Estate Tax, preventing the estate from paying both taxes.

Real Estate Taxes

The Grantor of the Trust is responsible for paying the real estate taxes. Once the deed is signed and filed with the County Clerk, a copy is provided to the Municipal Tax Office. This office will update its records, listing the Trust as the owner, sending the tax bills to the house in the Trust’s name. The Grantor continues to receive certain tax benefits provided to New Jersey homeowners. The real estate taxes can be deducted, and the New Jersey Homestead/New Jersey Saver Rebate, the Senior Citizen’s Deduction and the Veteran’s Deduction, if applicable, can all be maintained.

Since the Trust now owns the house, if the home is sold during lifetime, the Grantor would not be entitled to any portion of the sale proceeds. It must stay in the Trust. However, the Trust can buy another property and give the Grantor the use and occupancy rights in the second property.  If the home is rented, the rental income would pass to the Trust. This is a great benefit as Medicaid could not count the sale proceeds or rental income toward the cost of care.

Medicaid Liens and Estate Recovery

The regulations governing Medicaid estate recovery are complex. The basic rule is that if an individual has been a recipient of correctly paid Medicaid benefits, then upon that recipient’s death, the state may recover those benefits from the recipient’s estate. No recovery exists if the recipient leaves a surviving spouse, child under age 21, or blind or disabled child.

The Medicaid Estate Recovery Unit has interpreted the estate recovery statute to apply only to life estates created by will rather than by deed. Thus, a transfer of assets to the Personal Residence Trust while retaining the use and occupancy is one of the most ideal asset protection planning technique.

Conclusion

To determine if the Personal Residence Trust planning technique makes sense to protect your assets from the skyrocketing nursing home costs, you must be proactive as the five year lookback period starts when the deed is recorded. Please contact our office to schedule an appointment and get professional legal advice for your situation. You will begin the process of ensuring more of your hard earned assets pass to your family members, not the government or nursing home.

Benjamin D. Eckman, Esq. concentrates his practice on Elder Law & Estate Planning. Elder law is intended to broadly assist “extended living”. An elder law practitioner provides the legal information necessary for persons whose lives will extend or have already extended beyond the time when all children are usually out of the house and when regular employment ceases. After the elder law attorney and client complete their work, legal documents have been drafted, tax considerations have been analyzed, and a plan to protect the elder’s estate has been implemented.

Benjamin D. Eckman’s practice focuses on Estate Planning & Elder Law – legal issues facing senior citizens. Benjamin D. Eckman received his Bachelor’s Degree in Business/Accounting from Touro College and his law degree from Seton Hall University School of Law. He is a member of the New York State Bar Association, the New Jersey State Bar Association, the National Academy of Elder Law Attorneys, the Elder Law Section and Real Property, Probate and Trust Section of the New Jersey State Bar Association, the Union County Bar Association, Passaic County Bar Association and the Bergen County Bar Association. He can be reached at (973) 709-0909, (908) 224-4357 or (201) 263-9161.