In a recent round table discussion, a number of couples and individuals were interested in planning for long term medical care. One of the issues that arose involved a woman who owns a number of rental properties. She asked about the options for titling the properties in her son’s name or, alternatively, using a Trust or LLC to hold the assets? Her concerns involved protecting the properties, both in the event that she requires long term medical assistance and needs to qualify for Florida Medicaid or, in the event that her son is involved in a life event such as a divorce or bankruptcy. Her concerns inspired me to revisit the ways to use an LLC for Medicaid planning as an alternative to an outright transfer of assets to an adult child.
LLCs vs. Outright Gifts for Medicaid Planning
An Outright Gift To Family Members Can Result In A Penalty For Medicaid Purposes, And Utilizing An LLC Can Be An Effective Alternative.
In a previous article, I discussed the problems that can arise when parents transfer assets to adult children as a Pre-Medicaid planning strategy. Among the various problems that arise are Medicaid penalties and increased liability due to the risk of exposure to the adult child’s creditors who could make a claim against the parent’s assets.
3 Top LLC Transfer Benefits
An LLC can be an effective option compared to an outright transfer to an adult child for Medicaid planning purposes for the following 3 reasons:
1. A transfer to an LLC can give a majority of ownership interest to an adult child while allowing the parent to maintain control of the assets held by the LLC.
A key advantage to an LLC is it’s great flexibility. It can be customized to accommodate the needs of a specific situation and this includes a scenario involving pre-Medicaid planning. For example, an aging parent could transfer 90% of the equity in an investment property in the form of “LLC Membership Interest” to an adult child, and yet the parent could maintain full management control over the LLC. This can be accomplished through a well drafted Operating Agreement and could be achieved in a number of ways such as various “classes” of membership interest or restrictive Management rights. There are many options and possibilities available.
2. An LLC Operating Agreement can provide that a parent retains a majority interest in the LLC assets and potentially still qualify for Medicaid.
Under the Medicaid rules in some states, including Florida, an asset may be deemed “not countable” if it is an investment property that is rented and produces a reasonable return on investment. The income generated by the investment property would be counted under this scenario. This same principal applies to an investment property held in an LLC that is producing an reasonable ROI. The advantage with the LLC is that the parent can allocate some of the “asset value” and some of the “income” to the adult child as a co-member owner.
3. A transfer to an LLC can offer estate planning and tax benefits that are not available with an outright transfer.
A transfer of an asset to an adult child is of course a “gift” and any gift over $500 could be subject to a gift tax if not within the $14,000 exclusion allowed by the IRS, or the lifetime exclusion amount of $5,430,000. If you face this issue, a gift of LLC membership interest to an adult child can be “discounted” for tax purposes to a lesser amount that is based on a formula. This option is not available for outright transfers. An LLC can also include what is called a “transfer upon death” provision that may eliminate the need for probate in the event of the death of one of the members.
LLCs Can Provide Additional Asset Protection When Transferring Assets
An LLC provides superior asset protection for both parent and child in the event of a lawsuit or other claim, and thus the LLC limits the parent’s risk verses “co-titling” the asset.
A well prepared LLC with an effective Operating Agreement, can act as a shield to creditor claims. This means that the risk that is “inherent” in adding your adult child’s name to your asset title is lessened by the use of an LLC. Generally, LLCs carry what is called “charging order” protection and this means that the creditor is restricted from attaching a lien and obtaining a forced sale of LLC membership interest or its assets.
Of course, I always counsel people to understand that an LLC is not a magic bullet and there may be circumstances such as divorce or bankruptcy where the LLC is implicated in the controversy and may become subject to the creditor claims. However, if an LLC is in the picture, the process of negotiating with creditors becomes a matter of strategy rather than the slam dunk that occurs when the parent simply gifted the asset to the adult child.
To learn more about other LLC benefits, check out our prior article focuing on the asset protection benefits of LLCs for average people.
For all the reasons discussed, LLCs should be considered as a strong option verses outright gifting and, of course, all these ideas should be discussed in detail with your favorite estate planning or elder law attorney prior to doing anything.
This is an updated version of a prior post dated April 7, 2016.