Question:

I have a client for whom I am selling her mother’s home. Her mother has dementia (some days better than others) and has been in a nursing home for a couple of years. She applied and got Medicaid around the end of 2022. The mother receives approximately $2,555 a month between two pensions and Social Security. The daughter (my client) has durable power of attorney for her mother, but the daughter is 62 and permanently disabled. What would be the best way to handle the approximately $225,000 of net proceeds so that her mother is taken care of, can stay on Medicaid, but also have some proceeds left for the daughter?

Response:

The first question is whether the state Medicaid agency has a lien on the property. They are permitted to place such liens, but don’t always. In your client’s case, if she has been living in the house, her mother should qualify for an exception due to her daughter’s disability. If the Medicaid agency does have a lien, you’ll have to negotiate with them regarding how much is owed and how much will have to be paid from the sale proceeds.

After that, the mother can transfer the remaining proceeds into a trust for the sole benefit of the daughter. Normally, any such transfer causes a penalty of a period of ineligibility for Medicaid for the nursing home resident of up to five years. But there’s an exception for transfers into trust for the sole benefit of a child who is permanently disabled. Such a trust will also permit the daughter to continue to qualify or qualify in the future for public benefits herself.

If the daughter does not want a trust, there’s a way to structure the transaction to avoid it, but it’s more complicated. Here’s how it would work: Another exception to the transfer penalty would permit the mother to transfer the property to the daughter outright prior to its sale without using a trust. Then the daughter could sell it and keep the proceeds. This would also protect the home and the proceeds of the sale from any Medicaid lien.

This approach may, however, cause a tax on capital gains which could otherwise be avoided, since the daughter would not qualify for the $250,000 exclusion on capital gains available to homeowners. To qualify for that exclusion, the homeowner must have lived in and owned the property for at least two of the five years prior to sale.

Given the complexity of all the above, I’d recommend engaging a local elder law attorney. One place to find one is www.elderlawanswers.com.

 

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