2 Ways to Protect Your House if You Need Medicaid Coverage of Long-Term Care
There’s a common refrain that “the nursing home is going to take my home.” Technically, this is not accurate, but effectively it could be. In most instances, you can keep your home and get Medicaid coverage of your nursing home care after you have spent down your other assets. (We have a complete explanation of these rules here.) But you (or your children to be exact) could still lose the house or its proceeds. First, if you sell the house it will be cash which will have to be spent down. Second, at your death, the state will have a claim against your state for recovery of costs paid out on your behalf. (For an explanation of estate recovery and Medicaid liens, go here.)
Life estates and irrevocable trusts are two estate planning techniques you can use to avoid estate recovery.
As is explained above, after a Medicaid recipient dies the state will seek to recoup from his or her estate whatever benefits it paid for the recipient’s care. Given the rules for Medicaid eligibility, the only probate property of substantial value that a Medicaid recipient is likely to own at death is his or her home. However, states that have not opted to broaden their estate recovery to include non-probate assets may not make a claim against the house if it is not in his or her probate estate.
For many people, setting up a “life estate” is the simplest and most appropriate alternative for protecting the home from estate recovery. It is created by the parent or parents deeding the house to the children but on the deed reserving the right to live in the property for the rest of the parents’ lives. It is, in essence, a form of joint ownership of property between two or more people where they have the right to possess the property for different periods of time. The person holding the life estate possesses the property currently and for the rest of his or her life. The other owner has a future or “remainder” interest in the property. He or she has a current ownership interest but cannot take possession until the end of the life estate, which occurs at the death of the life estate holder or holders.
In all but a few states, once the house passes to the person with the remainder interest, the state cannot recover against it for any Medicaid expenses the person holding the life estate may have incurred. Still, as with any transfer, the deed into a life estate within five years of an application for Medicaid can trigger an ineligibility period, so it’s important if possible for the parents to keep enough savings to cover their care for the five years after creating the life estate.
The life estate has a few drawbacks. First, if the property is sold during the parent’s life, the proceeds will be split between the parent and the children based on the parent’s age and life expectancy at the time of the sale. If this occurs while she is in a nursing home, her share of the proceeds will have to be spent down on her care. Second, upon the sale, the parent will only be able to use the $250,000 capital gain exclusion for her share of the proceeds. The children will have to pay the taxes on the share of the capital gain going to them. Third, problems can occur if a child passes away before the parent or refuses to cooperate in the sale of the property.
Another potential application of the life estate concept (or joint ownership, which also passes automatically at death) is for parents to purchase a life estate in a child’s home and then move in with the child. The purchase must be for the fair market value of the life interest. However, the purchase of a life estate within the five years prior to applying for Medicaid benefits will be considered a disqualifying transfer unless the Medicaid applicant lives in the property for at least a year.
These drawbacks can be avoided through another method of protecting the home from estate recovery which is to transfer it to an irrevocable trust (very similar to the income-only trust described here). Once the house is in the trust, it cannot be taken out again. Although it can be sold, the proceeds must remain in the trust. This can protect more of the value of the house if it is sold than might be the case with a life estate. And it should permit using the parent’s entire capital gain exclusion when the house is sold. The trust is more complicated and more expensive to set up than a life estate. Also, unlike a life estate, it cannot be reversed or “cured” if a parent needs nursing home care within the five years following the trust’s creation. Where the parents have little funds other than the house or are already ill or showing signs of dementia, a life estate is generally preferable to a trust.
Remember that the creation of a life estate or irrevocable trust will cause ineligibility for Medicaid for the subsequent five years, so these methods may be used for advance planning but not at the last minuted. Also, beware that these standard planning devices may not work in states that have elected to seek estate recovery of non-probate as well as probate property. In any case, given state variations, changing state laws, and the circumstances of individual clients, it’s important to consult with an experienced elder law attorney before taking any steps to shelter one’s home or other assets.