November 9

What Is Cost Basis and How Do You Prove It?

Knowing the “cost basis” of your property is important for tax purposes, but proving cost basis can be difficult. Cost basis adjusts at death, so it is a good idea to appraise property when a joint owner dies.

Cost basis is the monetary value of an item for tax purposes. When determining whether a capital gains tax is owed on property, the basis is used to determine whether an asset has increased or decreased in value. For example, if you purchase a house for $150,000, that is the cost basis. The cost basis can be increased by improvements to the property. If there are no improvements and you later sell the house for $250,000, you will have to pay taxes on the $100,000 increase in value.  (However, if the property is your principal residence, you can exclude up to $250,000 in gain, or up to $500,000 for a couple.)

When a property owner dies, the cost basis of the property is “stepped up.” This means the current value of the property becomes the basis. For example, suppose you inherit a house that was purchased years ago for $50,000 and it is now worth $250,000. You will receive a step up from the original cost basis from $50,000 to $250,000. If you sell the property right away, you will not owe any capital gains taxes.

When a joint owner dies, half of the value of the property is stepped up. For example, suppose a husband and wife buy property for $200,000, and then the husband dies when the property has a fair market value of $300,000. The new cost basis of the property for the wife will be $250,000 ($100,000 for the wife’s original 50 percent interest and $150,000 for the other half passed to her at the husband’s death).

The burden is on the property owner to prove cost basis, and it isn’t always easy to prove, especially if it has been awhile since the property was purchased or improvements were made. Homeowners should keep good records of improvements to a house, which means keeping receipts and purchase orders. If a joint owner of property dies, you should get the property appraised to show the value at the time it is “stepped up” in basis. Be sure to save the documentation so you can use it later.

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November 6

New Rules Will Make It Harder to Qualify for Long-Term Care Help From the VA

The Veteran’s Administration (VA) offers a pension benefit to low-income veterans (or their spouses) who are in nursing homes or who need help at home with everyday tasks like dressing or bathing.  The pension, called Aid and Attendance, is currently underused, but impending regulations will soon make it available to even fewer veterans. The new regulations will for the first time specify asset limits for qualification and impose a look-back period and transfer penalties similar to Medicaid’s. The looming changes mean that those considering applying for Aid and Attendance should act quickly.

Currently, to be eligible for Aid and Attendance a veteran (or the veteran’s surviving spouse) must meet certain income and asset limits. The asset limits aren’t specified, but $80,000 is the amount usually used. However, unlike with the Medicaid program, there are no penalties if an applicant divests him- or herself of assets before applying.

The proposed regulations will set an asset limit of $119,220, which is the current amount (in 2015 and 2016) that a Medicaid applicant’s spouse is allowed to retain. But in the case of the VA, this number will include both the applicant’s assets and income. It will be indexed to inflation in the same way that Social Security increases. An applicant’s house will not count as an asset, but there is a two-acre limit on the lot size that can be excluded.

The regulations also establish a three-year look-back provision. Applicants who transfer assets within three years of applying for benefits will be subject to a penalty period that can last as long as 10 years. To avoid the penalty, applicants will have to present clear and convincing evidence that the transfer was not made in order to qualify for Aid and Attendance benefits.

Under the new rules, the VA will determine a penalty period in months by dividing the amount transferred by the applicable maximum annual pension rate (MAPR). The MAPR for surviving spouses is a little more than half the MAPR for veterans, which means the penalty period for a surviving spouse would be almost twice as long as a veteran’s penalty period would be for the same transferred asset.

It isn’t clear yet when the new regulations will take affect, but they could be in place as early as January 1, 2016, and some VA offices are reportedly already processing applications under the new rules. If you are considering applying for Aid and Attendance benefits, you should start the process immediately. 

To read the regulations, click here. 

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November 2

State Not Required to Consider Medicaid Applicant’s Reformed Trust

A Massachusetts appeals court holds that the state is not required to recognize the reformation of a Medicaid applicant’s trust after the original trust was considered an available asset. Needham v. Director of the Office of Medicaid (Mass. Ct. App., No. 14-P-182, Oct. 20, 2015).

Maurice Needham created an irrevocable trust that instructed the trustee to accumulate principal to use for Mr. Needham’s benefit. The state denied Mr. Needham’s application for Medicaid benefits, finding that the irrevocable trust was an available asset because Mr. Needham retained control over the assets. Mr. Needham reformed the trust to remove the provision that made him ineligible for benefits, and appealed the state’s decision.

The hearing officer determined that under the original trust, Mr. Needham was not eligible for benefits and concluded that the reformation of the trust was a transfer of assets within the look-back period. Mr. Needham appealed to court, which ruled that because a court had approved the reformation of the trust ab initio, it was as if the original trust never existed. The state appealed.

The Massachusetts Court of Appeals reverses, holding that the state was not required to consider the reformed trust. The court states that if Medicaid applicants were allowed to reform trusts during the look-back period, then “persons of means would be permitted to enjoy otherwise countable assets held in trust throughout their lives, transfer those assets for less than fair market value by reforming the trust ab initio when their health declines, and thereby obtain Medicaid payment for long-term nursing home care without complying with the waiting period imposed by Federal law.”

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