Leonard Golub, CFA, MBA
Fiduciary Advisor
4119 Montrose Blvd
Suite 400
Houston, TX 77006
800-724-9866
info@newcapitalmgmt.com
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November 21, 2018

Medicaid Planning: Protection of Principal Residence

Why should the protection of your principal residence be a concern?

Your principal residence can be entitled to a certain amount of protection for Medicaid purposes during your lifetime. Nevertheless, in certain cases, the state may be entitled to seek reimbursement for Medicaid payments by forcing the sale of your principal residence. For that reason, a nursing-home resident (or an individual who expects to be a nursing-home resident in the future) is often concerned with protecting his or her family house from the state.

For many people, a house is generally the most valuable and important asset they own. Not only does it have sentimental value, but it is sometimes the only means of passing down some financial security to children or other loved ones. However, the skyrocketing cost of nursing-home bills can jeopardize your ability to preserve the house for your loved ones.

Because the cost of long-term care is high, assets can be depleted very quickly. And while Medicaid planning can sometimes allow you to transfer your assets (including your house) beyond the reach of the nursing home and the state during the short term, it is possible that the state may, after your death, seek reimbursement from your principal residence for Medicaid benefits paid on your behalf.

Medicaid planning tools have been devised to protect your home, but their effectiveness varies. Therefore, it is important to weigh the costs and benefits of each device carefully.

What are Medicaid liens and estate recoveries?

Federal law encourages states to seek reimbursement from Medicaid recipients for Medicaid payments made on their behalf. There are two types of cost recovery actions against the assets of Medicaid recipients:

  • Real or personal property liens; and
  • Recovery from decedents' estates

Very briefly, a lien is a form of attachment against your property, signifying that someone else has certain rights or interests in the property; a Medicaid lien makes it impossible for you to sell your home or refinance your mortgage without the state's knowledge and ability to collect what's owed. As for recovery from decedents' estates, states also have the ability to seek reimbursement from your probate estate after you die. Additionally, states have the option to expand the definition of estate to include all nonprobate assets as well (to the extent of your legal interest in such assets at the moment before your death).

Does your marital status matter?

When it comes to protecting your home, marital status certainly does matter. Each state composes a list of exempt assets (those that do not affect your eligibility for Medicaid), which may include such items as one automobile and your principal home (so long as certain individuals reside there). However, assets that were exempt for purposes of determining Medicaid eligibility are not necessarily exempt from estate recovery proceedings after your death. Marital status can come into play in the following ways:

  • If you're single--If you're a Medicaid recipient and you are not married, your state can place a lien on your real property while you're alive if (after notice and a hearing) the state has determined that you cannot reasonably be expected to return home from your nursing home or other institution.
  • If you're married--If you're married, no lien may be imposed on your real property if your spouse or certain other people are lawfully residing in your house.

In either case, however, the state can often seek reimbursement after you die. However, it cannot collect on the lien or attempt estate recovery procedures until after the death of your surviving spouse (if any) and only after certain other individuals are no longer lawfully residing in the home.

Tip: With respect to the family home, however, always bear in mind that transfer of the house between spouses is allowable. It is not subject to a look-back period or to any other penalties. Likewise, the transfer of your home to a caretaker child, a sibling co-occupant, or a minor, blind, or disabled child is not subject to the "look-back" or penalties. Therefore, if a husband (for example) becomes institutionalized, he can deed his interest in the house to his wife so that it will stand in her name alone. She can then create a will naming her children (or anyone other than the institutionalized spouse) as beneficiaries. Certainly, this move would be the preferred method if a husband and wife have no time to plan and one spouse is about to enter a nursing home.

Of course, if you're single or if both parties expect to enter nursing homes in the future, then you should consider other options.

Which Medicaid planning tools are most useful for protecting your principal residence?

A number of Medicaid planning tools have been developed to help you qualify for Medicaid and protect your principal residence (to one extent or another) from the state. If you anticipate the need for long-term care and are looking for a strategy to preserve your home for loved ones, you should consider using one of the following four methods: (1) an outright transfer (or gift of the home), (2) a transfer subject to life estate, (3) a transfer subject to special power of appointment or (4) a transfer in trust.

Outright transfers--In a Medicaid planning context, an outright transfer of the principal residence simply means a gift; you freely deed your home to your children or other loved ones. Making a gift of your home is certainly better than a sale; a sale would simply convert the house to a countable asset--cash--whereas a gift would eliminate the house from your financial picture entirely, subject only to the applicable "look-back" period for transfers for less than fair market value. Making a gift of your principal home to your children protects this asset for them; the state cannot place a lien (or force a sale) on a home that no longer belongs to you and that cannot, under any definition, be considered part of your estate. Of course, gifting the home involves certain drawbacks, including tax consequences and losing your legal right to live in the home.

Transfer subject to life estate--With this planning tool, you transfer the remainder interest in your house to your children (or to whomever you choose), and you keep a life estate for yourself. This means that you have the legal right to live in the house for as long as you like. When you die, your children will own the home automatically and will receive a stepped-up tax basis. (That is, the basis of the property will be its fair market value at the time of your death). Those states that have adopted an expanded definition of estate may be able to force a sale of the property after your death, collecting the value of your life estate at the moment before your death.

Transfer subject to special power of appointment--With a special power of appointment, you transfer the ownership of your house to someone else, but you reserve the right to irrevocably redirect the house to a different person at a later time. This ability or power to redirect the home can be exercised during your lifetime (by a deed) or at your death (by a will)--but you can exercise this power only once. A special power of appointment cannot be exercised in favor of yourself, your creditors, your estate, or the creditors of your estate; in other words, you can redirect the house to anyone except someone in one of the aforementioned categories. This tool provides tax advantages. Also, the state cannot go after the house (either during your lifetime or after your death); however, you lose the legal right to live in the house.

Transfer in trust--Trusts can be either revocable (capable of being altered) or irrevocable (cannot be altered in any way). In the Medicaid planning context, the most effective form of trust for protecting the principal residence is the irrevocable income-only trust. This trust is an arrangement whereby you transfer your principal home to someone else (the trustee) who holds it for you, the beneficiary of the trust. You are entitled to receive only the income (if any) that the trust may generate; you cannot access the trust principal. Although a transfer into this form of trust will remove the house from your probate estate, those states that have adopted an expanded definition of estate may seek reimbursement. Specifically, your state may be able to force a sale of the home after your death and collect the present value of your income interest at the moment before your death as reimbursement.

Aside from Medicaid liens and estate recovery issues, what concerns may arise when considering the transfer of your principal residence?

It is important to realize that giving away your house (in whole or in part) in the hope of qualifying for Medicaid and/or preserving it for loved ones can sometimes create serious difficulties, including the postponement of your ability to qualify for Medicaid benefits, some unfortunate tax consequences, and the possible exposure of the property to your loved ones' creditors. Therefore, Medicaid planning is best done when you have time to carefully evaluate all of your options--that is, before your entry into a nursing home seems imminent.

  • If you transfer your home for less than fair market value within 60 months of the time you apply for Medicaid as a nursing-home resident (the "look-back" period), you may be ineligible to qualify for Medicaid for a period of months, based on a formula set by the state. This formula may be explained as the fair market value of the house at the time of transfer, divided by the average monthly cost of nursing homes in your locale. Nevertheless, there are occasions when a transfer of the home for less than fair market consideration will not create a period of Medicaid ineligibility. For details, select any of the four protection of principal residence planning tools discussed earlier.

Caution: It's also essential to understand that if you transfer your home for less than fair value, you should apply for Medicaid benefits only after the ineligibility period (if any) has run its course.

  • Your possible incapacity should be another concern. If you become mentally incompetent before you enter a nursing home, it may be very difficult (if not impossible) to effect a transfer of your home. Therefore, you should consider establishing a durable power of attorney years ahead of time. A durable power of attorney is a written instrument you sign whereby you legally authorize someone else to act for you in the event you become mentally disabled or incapacitated. That way, for example, a wife can transfer title of the family home out of her husband's name and into her own even after her husband contracts Alzheimer's disease. It's important, however, that the power of attorney specifically reference the power to sell, lease, mortgage, etc., the property.
  • As a final note, because the Medicaid transfer rules have been tightened in recent years (and may continue to change in the years ahead), it is wise for you to consult an attorney experienced in the Medicaid area if you are interested in planning.
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The information contained herein is based on sources believed to be reliable, but its accuracy cannot be guaranteed. The articles, information, calculators, and opinions presented herein are for general information only and are not intended to provide specific advice or recommendations for any individual. New Capital Management does not provide tax, accounting, or legal advice. All decisions regarding the tax or legal implications of your investments and finances should be made with your tax or legal advisor. New Capital Management is not a bank, mortgage lender, or broker. Nothing herein should be construed as an offer or commitment to lend. Any calculations are provided as educational tools, are hypothetical in nature, depend wholly on information you provide, do not assume the effects of all pertinent factors, and are not intended to provide investment advice or serve as a financial plan.



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