For many upper-middle-class individuals, their primary residence is their most valuable asset. While many people assume that owning their home makes their property safe, this is often not the case. Increasing real estate values in New York City have led the values of many moderately-priced homes to exceed $1 million, and as these homes continue to grow in value, their vulnerability to a variety of threats—particularly long-term care expenses—grows in tandem. Consequently, without proper estate planning, it is easy for one to lose their home to either nursing home costs or creditor claims. This article will help those who aren’t ultra-wealthy but still have a high-value home, meaning they have a lot at stake.
Listed below are the best ways to protect your home in the long term without losing any control of your property, doing illegal activity, or losing benefits like Medicaid.
Why the Homestead Exemption Leaves You Vulnerable
A common mistake that people make is relying on the homestead exemption. The homestead exemption protects a portion of your home’s equity—the part you truly own—by setting a legal limit on how much can be taken by creditors, healthcare providers, or companies attempting to collect unpaid debts. In New York, that amount is at most $179,950, so your protection is partial, not complete, and it may only cover a portion of your true equity. For a home that is over $1 million, this is very minimal coverage. Many individuals often don’t understand that this only protects you from some creditors and does not protect your home from nursing home costs or Medicaid estate recovery (which is when Medicaid programs seek to get reimbursed from the costs once the person has passed). As a result, assuming that the homestead exemption will protect your home under all circumstances is an extremely dangerous misconception. You cannot use this exemption as your only form of asset protection.
Protecting Your Home with a Medicaid Asset Protection Trust (MAPT)
One powerful tool for protecting a high-value home is an Irrevocable Medicaid Asset Protection Trust (MAPT). This trust allows you to transfer ownership of your house while retaining the right to live in it for the rest of your life. This type of trust involves a five-year “lookback” period under Medicaid, during which the program looks back five years to check if you transferred any assets simply to qualify for benefits. If you applied for Medicaid within those five years, you may not be eligible for nursing home coverage. Once the five years have passed, your home is fully protected and doesn’t count as your asset.
Ultimately, using a MAPT protects your house from nursing home costs and Medicaid estate recovery. An important thing to understand is that the person you choose to transfer ownership of the house to, the trustee, must be someone whom you trust completely to follow all of your instructions. Additionally, it is crucial to plan at least five years in advance to effectively use this tool.
For example, imagine a married couple in their 70s who own a high-value home together. Even though they live comfortably, they have become increasingly concerned about the rising costs of long-term care and want to make sure that their home is protected for their daughter. After consulting with an attorney, they were advised to establish a Medicaid Asset Protection Trust (MAPT) to allow them to live in their home for the rest of their lives, ensure that their daughter inherits the house, and avoid both probate and Medicaid estate recovery. A MAPT would be the most ideal option for a situation and relationship like this, allowing the couple not to worry about losing their home while maintaining the right to stay in it as well.
Using a Life Estate Deed for Simplicity
Another tool to protect your home is a life estate deed with enhanced powers. This is an arrangement where you grant yourself a “life estate,” meaning you can use your property for the rest of your life, and your heirs a “remainder interest,” giving them ownership following your death. This is an effective option that is less complex and expensive than setting up a trust, as a life estate deed allows you to avoid probate. Furthermore, your home will not be counted as a Medicaid asset as long as this arrangement is established at least five years before applying for Medicaid.
However, a drawback is that your control of your property is slightly limited, as you cannot sell your property without the consent of your heirs. Because of this, there is a lot of potential for family conflict and disagreements since your family has a legal claim to your property. Ultimately, a life estate deed is the better option for those who have strong relationships and are looking for a simplified planning option that doesn’t require as many complications. If you are looking for more control and flexibility, a trust is the better choice.
For example, imagine a widow who is 75 years old. She has a small family consisting of one son with whom she has a close and trustworthy relationship. Her biggest priority in estate planning is making sure that her home gets passed down to her son once she passes away. Because she has little risk of family conflict, the ideal tool would be a life estate deed. This is a simple way for her to retain her right to live in the home, but also ensure a smooth transition of ownership once she passes. This is a straightforward situation that requires a simple approach to estate planning instead of the costly and more complex tool of a MAPT.
Gaining Control Through a Family Limited Partnership
If you own a high-value home and are looking to pass it down to your children while still maintaining control, placing your home into a Family Limited Partnership (FLP) may be the best option. This arrangement allows family members to jointly own a property: you or your spouse would be considered the general partner while your kids would be considered limited partners, meaning that they don’t have decision-making power but still have interest in the home. This arrangement gradually transfers ownership to your heirs and allows you to avoid probate and protect yourself against creditors.
It is very important, however, to recognize that an FLP does not protect your home from Medicaid estate recovery and nursing home costs. Using an FLP on its own is not enough to protect your home—it is important to plan with a professional to combine an FLP with other tools to ensure full security.
Why Acting Early—Not Later—Can Save Your Home
If you are someone who owns a primary residence over $1 million in New York and has been under the assumption that you are protected, you should re-evaluate this as soon as you can. Due to continuously rising nursing home costs and unpredictable creditor claims, the homestead exemption is no longer sufficient.
If you want your home to be fully protected from costs in the future, you must act at least five years in advance. In fact, it is ideal if you take action today. A trusted estate planning attorney will offer a range of options and be dedicated to guiding you through the process to determine the most effective strategy for your specific needs. Call (718) 333–2394 today to speak with the Law Office of Inna Fershteyn to truly protect your home from financial threats.