Should Your Home Go Into Your Special Needs Trust?
The American dream so often includes home ownership. Most of us do not want to pay rent forever and want to have some control year in and year out of the place where we eat and sleep. Our homes become places where we create lasting family memories.
The home can also be a significant financial asset. The money we pay each month towards the mortgage becomes a forced savings into an asset that is not easily touched. Often, there is also some increase in the value of the home when we stay in the home for a long period of time. Yes, the last few years changed the equation for many as homes bought at a peak value may not have had any increase yet, but over time, many of us will see appreciation in our homes.
The home is a key asset to consider and review in financial planning and deciding how to fund a trust at some point in the future. Handled well, the home may create significant value that can be used to fund future expenses. Or, the home can be used as a place for your special needs family member to live for many years, while still preserving other government benefits.
A special needs person can qualify for government benefits if he or she has less than $2,000 in countable resources and meets the standard for a qualifying disability. Generally, families with any assets leave them in a special needs trust through a will so those assets do not count towards the resource limit. These may include investment accounts, savings and checking accounts, life insurance proceeds, artwork and jewelry, retirement accounts (which require special consideration) and maybe the family home.
The personal primary residence is not considered a countable resource under current Medicaid regulations. As such, it is not required to go into the special needs trust to maintain eligibility. It could be transferred directly to the special needs person. Most of the time, you do not want to do this.
The decisions you make with regard to the asset you have in your home must fit your overall personal situation.
You must decide how you plan to fund your own future expenses like retirement living expenses, travel, charitable giving, starting a business, funding a trust and more. You need to look at the value of your home and determine how it fits into those plans. For many, the value of the home is in the emotional and family memories and is not planned to be used for expenses. For others, the home may be the primary means of transferring value to future generations.
For those who plan to use their home as an asset to fund future special needs expenses, additional consideration must be given to how the home will be handled.
Financial assets, like stocks and bonds, do not require much by way of maintenance costs. Houses, on the other hand, need constant upkeep (at least my house does). The yard needs mowing, the trees trimming, carpets cleaned, gutters freed of leaves – the list goes on. You must consider whether the trust will be able to maintain the home over time so the special needs person lives in a safe, comfortable and thriving environment. If the home is the only asset in the trust, it is not likely that trust should keep the home over time.
A house can be owned by the trust or not. Most of the time, my recommendation is put the home in the special needs trust. The trustee becomes responsible for decisions related to the home, not the special needs person. The trust also provides a degree of asset protection for the value of the home.
Often, people who qualify for development disabilities under Medicaid do not have the ability to handle money well. They may find themselves committing to decisions they do not completely understand, including pledging the value of the house. The house, if owned directly by the special needs person, could be lost for any number of reasons. One that could happen to any of us is that we cause an accident, get sued, and must pay a settlement. The home could be used or required to be sold to pay the settlement. The trust is not required to pay the settlement so the house is protected.
The trustee will make a decision in the future about whether to sell the home or not. At some point, the special needs person may no longer be able to live in the family house. Health conditions change. The person might want to move to another county to be closer to friends and family. The value of the house at this point must be in the trust to keep the person on benefit programs. Home equity could be tens or hundreds of thousands of dollars, money that will have to be spent down to maintain benefit eligibility if the money is not in the trust – remember the $2,000 resource limit from above? The home is excluded. The cash proceeds from the home are not unless they are in a special needs trust.
How have you decided to handle the potential value of your home in your estate and financial planning? Take time this week to review your decisions to make sure they fit your planning needs and are used in the best way to support your special needs family member.
Rob Wrubel CFP®, AIF®, is a Senior Vice President, Investments with Cascade Investment Group, member FINRA & SIPC. Rob is also a father of a daughter with Down syndrome. Cascade Investment Group is not a tax or legal advisor. You should always consult with your tax advisor or attorney before taking any actions that may have tax consequences. Call Rob at (719) 632-0818 if you have questions or to set an appointment.