The Expensive Home Deed Error Couples Can Make When One Spouse Falls Ill

When one spouse develops a serious illness, keeping both names on the family home’s deed can create financial and estate-planning problems that are easy to miss.

In a recent video interview, Harry Margolis, author of Get Your Ducks in a Row, discussed why putting the home in the healthier spouse’s name can be a smart move, what tax advantages a couple might give up, and how delays can make the situation harder to fix.

Here is an edited transcript of that conversation, shortened for clarity.

What if the healthy spouse dies first?

Bob Powell: Harry, when one spouse becomes seriously ill, should couples think about removing that spouse from the home deed? What financial danger exists if they do not?

Harry Margolis: In many cases, when one spouse becomes ill later in life, it does make sense to take that person off the deed for several reasons.

Most married couples hold their home as tenants by the entirety, a type of joint ownership. When one spouse dies, ownership automatically shifts to the survivor.

The bigger downside is what happens if the wrong spouse dies first. The healthier spouse dies, and the home is now in the sick spouse’s sole name… And if that person is in long-term care and on Medicaid, the house may later be subject to Medicaid estate recovery.

There is also a possible benefit to leaving the deed unchanged. The surviving spouse may receive a partial step-up in basis when the first spouse dies, which could reduce capital gains taxes if the house is later sold.

But the greater risk is what happens if the wrong spouse dies first. The healthier spouse passes away, and the home ends up only in the name of the spouse who is ill.

That spouse may no longer have the ability to manage the property. And if they are in long-term care and receiving Medicaid, the house may be vulnerable to Medicaid estate recovery after their death.

Why transfer the home to the healthy spouse?

Powell: How does changing ownership help protect the couple’s finances?

Margolis: The main reason is control. The healthier spouse can make decisions that make sense for the property.

They can sell it, borrow against it if necessary, or take estate-planning steps such as moving it into a trust.

That is why we generally recommend placing the house in the name of the healthier spouse.

Why a deed change alone may not be enough

Powell: If the couple transfers the home to the healthy spouse, is that enough protection?

Margolis: The healthy spouse also needs to update the estate plan.

If that person has what I call an “I love you will,” meaning everything passes to the surviving spouse, then putting the home in one spouse’s name does not help much if the property simply goes back to the ill spouse under the terms of the will when the healthy spouse dies.

The will needs to be revised. The healthy spouse can either leave the ill spouse out entirely or place the property in trust for that spouse.

How a testamentary trust can help

Powell: How does leaving the home in trust work, especially if the ill spouse needs long-term care?

Margolis: Medicaid rules include a special safe harbor for what are known as testamentary trusts. These are trusts created under a will.

The healthy spouse can adjust the estate plan so that if they die first, all or part of the estate remains in a testamentary trust for the spouse who is ill and possibly living in a nursing home.

The money or property can still be used for that spouse’s needs, but it does not have to be exhausted to cover long-term care costs, and it is not subject to Medicaid estate recovery.

Does the spouse need to be terminally ill?

Powell: When we talk about a sick spouse, are we necessarily talking about someone with a limited life expectancy?

Margolis: There is a time factor, but it is really more about the cost of care.

Someone may have Alzheimer’s or may have suffered a stroke. Their life may be shortened, but they may also need care for the rest of their life, and those expenses can become significant.

What if dementia prevents someone from signing?

Powell: Suppose someone has dementia and is still listed on the deed. What mistake should families avoid?

Margolis: The mistake is leaving the person’s name on the deed. The property needs to be moved into the healthier spouse’s name.

That raises another issue: if the person has dementia, how can they sign the deed?

That is one reason to plan early, before dementia progresses to the point that capacity is lost.

There is no sharp line where one day a person has capacity and the next day they do not. It is often a gray area.

More Retirement

If there is still some understanding or cognitive ability, the person may be able to express enough to say, “I want to protect my spouse and put the house in her name,” even if they cannot handle something more complicated.

But if they cannot even state that wish, the transfer may need to be completed through a power of attorney. In some cases, court approval may ultimately be required, which is more expensive.

Why a durable power of attorney matters

Powell: Figuring out whether someone has the capacity to sign legal documents can be difficult, right?

Margolis: Yes. The notary or witnesses have to form an opinion about whether the person understands what they are signing.

That is one more reason everyone should have up-to-date durable powers of attorney.

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