|Dear Michael: We would like to protect our property in the event we enter a nursing home or need some type of long-term care. If we sell our land to our son on the farm on a contract for deed, rather than renting it to him, Medicaid couldn't take this property away from our son, could they? Also, do they require that we charge a certain interest rate on the contract for deed? – Selling Out to Protect the Land.
Dear Selling: There are a lot of different issues that come in to play when you think about using a contract for deed on selling land and having it protected.
First of all, you have to remember there's not one but two government agencies involved in such a transaction. There is Medicaid or Department of Health and Human Services and there is the Internal Revenue Service or IRS. These are two entirely different agencies and they have two entirely different criteria and concerns – although some of them may overlap in some cases.
First of all, let's talk about the minimum interest rate you can charge on a loan. This is primarily an IRS criteria and not so much Medicaid's. IRS states for any loans over nine years, in the month of October, you must charge at least 2.87% interest upon any contract for deeds. For periods of less than nine years, there is a lesser interest rate allowable. I say 'this month' because IRS changes this rate monthly, and likely there will be a different rate in November.
If you do not charge this much interest, IRS can put 'imputed interest' (interest you didn't charge but should have) on your income tax return and make you pay income tax upon the amount.
Now, let's talk about an issue where both IRS and Medicaid become involved and this would be in the arena of 'gifting'.
IRS has a rule that if you gift more than $13,000 to a grantee, then the excess would come off of your Unified Credit. As many of you know, this Unified Credit is $5,120,000 individual and $10,240,000 for a married couple. However, this Credit may change at year's end depending on what Congress does with the entire income tax bill after the election.
If one were to make a major gift in the year 2012, you would still be under the $5,120,000 Credit this year. However, if next year this Credit decreases, it may mean the gift you made in 2012 might make the entire remainder of your property wholly taxable because the gift goes against the Credit in the year of your death, as well as the year you made the gift. The best solution, from a possible changing Unified Credit standpoint, is to give everything away in 2012 so you have no other property left in 2013. In practicality, gifting away your last nickel is usually not a good idea.
Medicaid, on the hand, has a wholly different agenda. If you need to apply for Medicaid in the future, they are curious whether you made 'any' gifts within the past five years under the five-year look back period. They don't care about $13,000 this or five million credit that. They want to know how long your are ineligible for Medicaid benefits based on any and all gifts you made.
A 'gift' means to IRS you gave away a portion of your Unified Credit early.
A 'gift' to Medicaid means you are ineligible for Medicaid benefits if you should need care within the next five years. The simple formula Medicaid uses is to take the amount of the gift, divide it by your costs of care, and that's how long you are ineligible.
For example, the appraised price was $300,000 and your son pays $200,000. This means a 'gift' of $100,000 to your son.
IRS will say you lost $87,000 ($100,000 minus the $13,000 allowed) from your Unified Credit. Depending on what you have left and what the Credit is in the future, this may or may not be a 'huge' issue – no one knows for certain.
Medicaid will say, if you need to apply for benefits, the $100,000 gift divided by, let's say for example, $3,000/month costs of care would make you ineligible for Medicaid benefits for 33 1/3 months or until your death, whichever comes first.
After the fifth year, on a contract for deed, although Medicaid cannot bring in the 'gift' portion of the sale, they still has the power to call the note in so you can pay for your care. After the fifth year, if your son still owes $150,000 on the contract for deed, he will be going to the bank to pay this loan off, place that money into your checking account, and likely he won't get the new loan locked in for 2.87% for the entire term any longer. At least the 'gift' portion can no longer be brought in any longer, however, so it's a step in the right direction.
These are all items you can look up on IRS's website and the Department of Health and Human Services website to do these calculations. Again, I'm not advising you to do one thing or another – I'm just giving some examples based on their website information.