Why It’s Best to Nest

January 31, 2022 Austin DuBois

Protecting rental properties from Medicaid expenses.

When I help clients who own rental properties with their estate and long-term care planning, nine times out of 10, that property is yielding some sort of income. These folks enjoy the added measure of comfort and security that the extra money coming in each month provides, and are looking forward to the time when they can pass that asset on to their heirs. They spend their lives working hard for that investment, so I encourage them to take every advantage of the legal options available to them to protect its value and income potential against things like accidents at the property and, even more so, the prospect of long-term care costs.

To avoid having rental income tapped for Medicaid expenses down the road, being proactive with your estate planning is the single best way to protect and maintain optimal control over your assets. Having your rental property be part of a trust is a good start, but whether a client’s plan includes things like potential Medicaid costs or not, I always advise folks who have a rental property to go with an additional layer of protection – having the property held in a Limited Liability Company (LLC).

First, a value proposition.

Let’s say a rental property is valued at $400,000 and generates $1,000 of income a month. Isn’t it worth it to spend a little bit of money and time with a lawyer who will help you make sure that you don’t end up bleeding out that $1,000 a month in the future?

Having a trusted elder law attorney get you set up with an LLC allows you to continue enjoying your rental income stream while also having the flexibility to effectively divert that money out of the way of Medicaid costs, keeping it from being spent down on long-term care should the need arise.

Simply put, if you know what you’re doing with asset protection when it comes to investment properties and long-term care, you can have your cake and eat it, too.

Why not just a Medicaid trust?

Trusts are great. In fact, we love them for many reasons, which you can read about here. Trusts provide people with solid protection and easy access to their rental income, something they generally prefer not to give up. The downside, however, is that if you put the rental property in a trust without it being in an LLC, it is difficult to shield its income from being tapped for long-term care costs should they have to apply for Medicaid. By placing your rental property into an LLC, the added level of asset protection means that you can essentially take that income off the table when you choose.

What does an LLC do?

Without digging too deeply into the details and nuances here, placing your rental property into an LLC basically means the property and the income it generates are separately held from your personal assets. So, if something were to happen to a tenant or guest at your property and that party brought a lawsuit against you, any ruling not already covered by your insurance could only be recouped from the assets of the LLC, typically the property itself and maybe a checking account for depositing rent and paying out related expenses. The big deal here is that they cannot come after your personal assets – your home, personal savings, investments, etc.

But, here’s the even bigger deal! Having the property held in an LLC also provides the flexibility to change who’s entitled to receive the income within the LLC. So, instead of having to scramble to turn that income stream off to avoid it being absorbed by Medicaid costs, you can actually redirect the income to a designated family member, effectively taking it off the table.

We’ve seen it work!

To pick one example: We have a client who had previously set up a trust and included in it their rental property. With the possibility of long-term care needs in the picture, we put the property into an LLC. Instead of the income being on the table when the client needed long-term care, we were able to redirect the income to his son. So, dad received full Medicaid coverage, the rental income continued, and the son was able to apply it to expenses not covered by Medicaid.

Of course, why this is so fantastic, is because qualifying for Medicaid coverage is an excellent way for people to be able to stay in their homes for as long as possible as they age, living the lifestyle they choose without having to go broke doing it.

How an LLC can protect you.

I’ve said it before, find an elder law expert you can trust! While an LLC is a simple and effective way to protect your rental income from long-term care costs, it pays to have an expert set one up that will best meet the unique circumstances and goals of your personal estate plan. Especially when it comes to the intricacies of nesting an LLC within a trust, it’s best not to go it alone.

We can help, and we’re ready when you are.