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.
Such an informative article! Thank you so much! This has definitely given my mother and I something to think about. I’d love to see a comparison of putting a property into an LLC in the way that you mentioned, versus an Irrevocable Trust, when it comes to medicaid planning. I’m currently researching the benefits and drawbacks of each option.
Hello Angela, sorry for the late response. There are pros and cons to each that would most appropriately be discussed in more detail in an personalized conversation. In general, the benefits of an LLC are that they are less complicated to create and can be revoked whereas a irrevocable trust is more set in stone. There are also tax considerations (and potential benefits) when transferring property to an irrevocable trust. Let us know if you’d like to take that next step.
Best,
Steve Gibbs, Esq.
Hi. Great article. First one I’ve found regarding LLC’s and Medicaid planning. My question is this. My wife and I have had OUR llc for 15 years. What if we purchase Mom and Dads house through that LLc? They get the equity from the sale and we get title and Medicaid gets nothing because the LLc is a seperate legal entity. For purposes of this question assume the LLc is legit. We’ve had it for our business for 15 years. 15 years of tax returns. Real property held in the llc. Banks account etc.
Hi Mark, thanks for reading and your comment. As I often tell people, it is easy to think one can outsmart Medicaid and yet what tends to be true is they’ve already thought of (and taken measures to prevent) most moves that someone could try to beat the system. However, there are established exceptions to the rules and we help people navigate within the system using the established rules to maximize benefits to families. With that in mind, your LLC can certainly purchase a home from your parents; however, they still need to account for the funds. Whether your LLC is a valid business is probably not relevant, as you could do the same purchase directly with or without the LLC. Also, purchasing your parents home may not be a good idea because a homestead is often treated as exempt under Medicaid rules in FL, whereas cash from a homestead sale may not be exempt as a countable Medicaid asset. All of this is very fact specific and depends upon the unique circumstances and thus the need for true expertise BEFORE acting. I have witnessed so many transfer mistakes involving adult children of Medicaid applicants and these are often VERY costly. I hope this offers some insight and happy to schedule a discussion at your convenience.
Best,
Steve Gibbs, Esq.
Thank you so much your article is very informative. I’m in NYS and my situation is this I own 2 properties value of $700K which I own in a sub-S corp inside a 1031 exchange If I were to gift shares to my children I may be triggering a tax consequence. What would you recommend
Hello Doris, thanks for your comment. It is very difficult to get an understanding of your situation in a short blog comment, so I typically don’t give “advice” without an in depth discussion. However, in general, “gifting” real property may not be beneficial unless there is an estate tax issue requiring reduction of the estate OR if there is a pre-Medicaid planning strategy to be considered. One reason for this is the loss of step-up in basis due to gifting.
For a more in depth discussion, feel free to reach out to Gene to schedule at admin@gibbslawfl.com.
Best, Steve Gibbs, Esq.
Hi
I have been thinking about moving my investment rental property (value $200,000) into an LLC to protect it from potential future creditors. I am wondering if it would be an effective stately to give some percentage of the llc to my adult children over time, and keep perhaps 20% of the shares in my name. Meanwhile, I would use an operating agreement to allow me to manage the llc and take the profits during my life while healthy. Meanwhile, if I should become ill and require a nursing home; management and income would shift to the other shareholders including my wife. My assumption is that Medicaid would only have access to the 20% that I kept for myself. Note: I am healthy and would implement this strategy over time. I look forward to your comments.
Hello Bob, thanks for reading and your great comment. All of the ideas mentioned in your strategy appear to be solid; however, to go one better in FL a rental investment property is considered an exception under current Medicaid rules, so even your 20% should not be an issue under current laws, assuming everything is properly documented for Medicaid. That said, I recommend getting experienced professional help in setting everything up for many reasons, one example being there is a way to set up a rental property with a property manager and escrow account in order to property account for your actual income vs. expenses and maintain compliance with Medicaid income rules. All good stuff! Let us know if we can help you further.
Best, Steve Gibbs, Esq.
Do you have a recommendation for an NC attorney or do you also service NC? I am interested in a consultation. Thank you for the wonderful article.
Hello Kelsey, thanks for reading and your great feedback. I don’t have a reliable referral to offer in NC and am not licensed there so I’ll just suggest finding someone who practices in both estates and elder law AND demonstrates a commitment to educating people.
Best to you.
Steve Gibbs, Esq.
In New York if I’m on Medicaid already can I put my photography with family and friends into an LLC providing I have no income from profits of a Delaware LLC?
Hello Ron, thanks for reading. Although there are some similarities between NY and FL, I really can’t offer feedback as I do not practice and am not licensed in NY. Generally though, putting assets into an LLC still triggers transfer penalties and so I’d be very caution about making asset moves without obtaining professional advice in NY.
Best, Steve Gibbs, Esq.
Can you put everything in an LLC to protect it from Medicaid in Ohio ?
Thanks
Jack
Hello Jack, each state is different and I can’t comment about Ohio Medicaid law as I do not practice there.
Best, Steve Gibbs, Esq.
Hi, I’d like to set up a multi-member llc to take over a rental property my mom owns, the members would be my mom and myself. She is already in her early 80’s and might need medicaid in near future. Will setting up a llc be penalized by medicaid if she applys for it within 5 years after the formation of the llc? Or is there any better way to keep this property for the family? We are in Florida.
Hi Alex, there are always considerations when setting up an entity for Medicaid planning purposes. The first step is a consultation to go over the various aspects and potential issues with your proposed plan. To schedule, connect with Gene at info@gibbslawfl.com.
Best, Steve Gibbs, Esq.
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