One of the most popular concerns that we have clients bring to us is how to protect their real estate after their death. It is extremely important for real estate owners to keep the state Medicaid lookback period in mind. If you own a property within the last 5 years after applying for Medicaid, they may use the value of the property to determine your Medicaid eligibility. You hear horror stories of families being forced to sell the homestead of their loved ones to pay off Medicaid liens, but it doesn’t have to be that way.
While there are a few options available to keep your real estate within your family, you should consult with an attorney before deciding which route is most beneficial to your situation. Each method has its own advantages and disadvantages. The two methods that we’ll discuss are 1) transfer on death deeds and 2) pour-over wills coupled with an irrevocable trust
Perhaps the cheapest method to avoid probate is a transfer on death deed. The transfer on death deed names a grantee to receive title to real estate after the death of the grantor. Since no money is paid, there is also usually no transfer tax and only nominal recording fees will apply. It is a very simple process that takes minimal time, however, it may not be the most cost effective method of transferring your real estate. This method is also not usually protected against creditors and since the real estate is still held by the grantor, the Medicaid lookback period would still apply.
But there’s a way to solve the issues to those problems while also providing the grantor and their family with anonymity. A popular method is to utilize a pour over will with an irrevocable trust (or surviving spouse) receiving anything owned by the grantor at the time of their death. At the death of the last surviving spouse, all items that were previously owned by the individuals are now owned by the trust. An important rule to remember is that the pour-over will must be executed contemporaneously with an irrevocable trust. At the time of signing, it is also best to execute quitclaim deeds to the trust for real estate. Since no money is being paid by the trust, the transfer is exempt from transfer tax and only recording fees should apply.
The irrevocable trust is a separate entity that has its own identification number with the IRS that owns all property (real and personal) on behalf of the grantor for their lifetime. Upon the death of the grantor, the beneficiaries can be whomever the grantor chooses. The beauty behind the irrevocable trust is simple: you don’t own your real estate, the trust owns it for your benefit. There are other intricate details to irrevocable trusts that also need to be considered, but for the purpose of discussion we’re going to focus on estate purposes.
One of the largest benefits to an irrevocable trust is that it can contain a spendthrift clause. The spendthrift clause means that creditors of the beneficiaries cannot reach the assets of the trust. Another major benefit is the treatment of irrevocable trust with regards to the aforementioned Medicaid look back period. If an individual does not own a piece of real estate, it is usually not counted against their income.
The irrevocable trust is a great vessel to hold parcels of real estate you want to keep in your family. Otherwise, for investment properties, a series LLC is highly recommended. Consult with an attorney today to see which may be better suited for you.