Parent forms a nonprofit to own the property for use by the family member with a disability
Parents can explore the option of forming a nonprofit to own a property (home) for use by a family member with a disability. This option has significant limitations. Before choosing this option, the parent(s) should seek competent legal and tax advice.
Low Risk
High Risk
Much Control
Little Control
Much Control
Little Control
Flexible
Limited Flexibility
What is this?
Parents can explore the option of forming a nonprofit to own a property (home) for use by a family member with a disability. This option has significant limitations. Before choosing this option, the parent(s) should seek competent legal and tax advice.
A non-profit should not be confused with an IRS 501 (c) (3) qualified charitable organization. It is relatively easy to create a non-profit at the state level; it is very complicated for any non-profit to be deemed a charitable non-profit by the IRS. Even if it is deemed a charitable non-profit by the IRS, there is no guarantee that the non-profit would receive property tax relief.
If a non-profit is formed for the benefit of specific individuals, then a donor cannot take a tax deduction for any contributions, including the value of the property (home).
If set up properly, a non-profit can allow multiple individuals/families to invest in a single property with a clear goal in place and protected by a Non-profit Operating Agreement. A well-run non-profit has a Board of Directors that is responsible for not only ensuring the charitable purpose of the organization, but also making arrangements for any necessary insurance, property management, and management of the funds necessary for property management.
Any Operating Agreements should be written in conjunction with the assistance of an attorney with expertise in Medicaid.
What Circumstances Make this a Possible Fit?
- The parent(s) wants the value of the property (home) to be used solely for charitable purposes with no expectation that any equity will go to future family generations.
- The parent(s) is willing and able to seek professional, legal and accounting advice to establish a properly worded Operating Agreement to meet all non-profit requirements according to State law and IRS guidelines.
- A Board of Directors is willing to assume the responsibilities to ensure the charity continues after the passing of the parent(s) who originally created the non-profit.
What Does This Mean to My Family Member with a Disability?
Donation of the property can ensure the availability of housing for the family member with a disability beyond the life of the parent(s). The Non-profit Operating Agreement can dictate what this can look like. The parent(s) may specify things such as: how the rent will be set for the family member(s) with a disability, how many people can live at the address, how the other tenants for the home are qualified, and (in the case of changes in your family member’s situation) how long the space will be available in the case of a prolonged absence.
What Does this Mean to My Estate?
If the non-profit is formed and the property (home) is transferred to the non-profit during the parent(s)’ lifetime, the property is not part of the estate. If the parent(s) are placing the property in the non-profit upon the death of the parent(s), seek qualified counsel to ensure that estate planning documents properly address the parent(s)’ intent.
Where Do I Get More Information?
- National Academy of Elder Law Attorneys can provide information about Medicaid planning attorneys.
- Contact the local bar association for a referral to an attorney who specializes in non-profit formation.
Pros
Cons
Pros and Cons
Extent of Control
- Provides the ability to set parameters under which the housing is maintained for the family member with a disability.
- The non-profit is responsible for ensuring oversight of the day-to-day property management.
- The non-profit should carry liability insurance.
Effects on Public Benefits
- If properly set up, it will not impact benefits.
- N/A
Longevity
- A well-drafted Operating Agreement can address longevity issues to ensure the proper housing for the person with a disability.
- There is no conflict of interest with the party responsible for managing the non-profit. The property manager cannot inherit the property, so they have no reason to act improperly.
- If there are changes requiring a need to transition out of the home (i.e. health, deterioration of neighborhood), it may be more difficult to sell the home due to provisions in the non-profit Operating Agreement.
Property Management Responsibility
- The individual parent(s) is not responsible; the Board of Directors is responsible.
- The non-profit needs to provide for the payment of property management services.
Financial Considerations
- N/A
- Once the property has been in a non-profit it cannot be given outright to the next generation.
- The property can be sold by the non-profit, but all proceeds held by the non-profit must be used solely for charitable purposes.
- The property can also be transferred to a different qualified non-profit.
Long Term Flexibility
- The Board of Directors is responsible for ensuring the viability of the non-profit by making the best choices according to the non-profit operating agreement.
- Once the property is owned by the non-profit, though it can be sold, the money can only be used for charitable purposes laid out in the non profit operating agreement. The donor parent(s) does not have control. Instead the Board of Directors has final say on all matters.
Tax Issue
- In order to avoid paying real estate property taxes, the entity must meet the requirements of ORC 5709.12 meet the requirements of ORC 5709.12.
- May be eligible for tax deductions when the home is transferred to charity or donate funds to charity for purchasing the home if structured according to IRS standards prior to the transfer.
- Must meet State non-profit guidelines.
- If seeking tax-deductible status, must meet IRS guidelines.
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Created by a Home Think Tank workgroup.
Information on this sheet is provided for informational purposes only. Nothing in this document should be considered legal or accounting advice. Contact a professional for information pertinent to your specific situation.
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