To sort out these competing issues, your father first needs to figure out his estate tax situation. The federal estate tax doesn't kick in for estates under the $2 million
He does need to consider the possibility that he'll eventually have to go to a nursing home and need Medicaid to pay for it. The Deficit Reduction Act (DRA) of 2005 drastically changed the way financial planning could be done. In the past, he would have been able to give financial gifts to his children and grandchildren and not worry about those gifts disqualifying him for Medicaid. Now there's a five-year "look-back" period, which means that the state Medicaid authorities will inspect financial transfers and gifts going back at least five years, and penalize him by delaying his Medicaid eligibility if there are any transfers within that period.
In your father's situation, the house is probably his biggest asset. If he wants to stay in his home, he should talk to an estate planning or elder-law attorney about putting it into an irrevocable trust now. By putting the house in such a trust, he could shelter the home as an asset from Medicaid five years from now. Whatever the house's value, it will pass to his children or grandchildren at his death without going through timely and expensive probate (or, in qualifying cases, estate taxes). If he decides to set up such a trust, he should be very clear about the legal implications should he ever have a change of mind.
Because of the Medicaid look-back rules, if you're going to do any type of estate planning or Medicaid planning, the earlier you can do it, the better. Putting his house in an irrevocable trust now is probably the biggest opportunity your father has to protect his assets and still qualify for Medicaid in five years.
threshold, so he doesn't have to be concerned about federal estate taxes. He'll have to look at what the individual estate tax is in his state -- but where I live, for example, the threshold is $1 million, so chances are your father won't have to worry about either state or federal estate taxes.