24 May 2010
The first step is learning how the process works. There’s often a great deal of confusion regarding what happens to your house if and when you enter a nursing home. Some people have the good fortune of being wealthy enough to pay privately for their care. Although when nursing homes typically cost $100,000 a year, most of us are not that lucky. Others had the foresight to buy long-term care insurance. However, most of our clients are not wealthy enough to pay for their care and they either cannot afford insurance, or they would be disqualified because of their health. The remaining choice is Medicaid.
The first basic rule of nursing home Medicaid eligibility is that an applicant, whether single or married, may have no more than $2,000 in "countable" assets in his or her name. "Countable" assets generally include everything you own, except for your home (if it is located in Massachusetts and has equity less than $750,000). Everything else (second homes, retirement savings, life insurance) is counted and may have to be spent down before you can obtain eligibility. Although Medicaid will consider your home to be a noncountable asset, it is important to understand that does not mean your home is protected.
Noncountable does not mean Protected
A home with equity of less than $750,000 is considered a noncountable asset. Without proper planning, at death the State will have a lien against your house and Medicaid will seek reimbursement for benefits provided. On the other hand, there are steps you can take to avoid a Medicaid lien and protect your home, saving hundreds of thousands of dollars.
Although the risk of a Medicaid lien is very real, the good news is that Medicaid will not force you to sell your house if you enter a nursing home. As long as a Medicaid applicant indicates on their application that they intend to return home, Medicaid will not force the sale of the house. This is a subjective question and it does not matter whether there is any realistic chance that the person actually will be able to return home or not.
Many people think the best way to protect their home is to give it outright to their children. Although this may sound like the simplest solution, it may be the worst choice. Transferring a home outright to children can result in large capital gains taxes. Secondly, things can happen to children that can place the house at risk. What happens if a child gets divorced, is sued or has creditor problems? Seniors have been literally forced out of their own homes as a result of ‘gifting’ their house to their children. There are several strategies available which will protect the house from Medicaid but also protect your right to live in the house. However, before you consider transferring your house, you have to understand the Medicaid transfer rules.
The Transfer Penalty and the Look-Back
If you give away your assets it will make you and your spouse ineligible for Medicaid benefits for up to five years. When you apply for benefits, Medicaid reviews five years of bank statements in order to identify any disqualifying transfers. This is known as the “look-back period.” Any transfers that happened before the five year period are protected and do not have to be reported to Medicaid. However, if you apply for benefits during the look-back period, Medicaid imposes one month of ineligibility for approximately every $8,000 you give away. In addition, the clock does not start “ticking” on the ineligibility period until you are in a nursing and have spent down your assets.
Here’s an easy-to-understand scenario to help explain transfer rules: let’s assume Mrs. Smith transfers her condo worth $320,000 to her grandson on March 15, 2010. On April 15, 2011, Mrs. Smith suffers a stroke and is admitted to a nursing home. Assume she spends down her assets below $2,000 as of August 2011. Because she would be applying during the look-back period, Medicaid would impose 40 months of ineligibility ($320,000 ÷ $8,000 = 40 months). The transfer penalty would not start until August 1, 2011 and would end in January 2014.
Keep in mind that the rules are different for married couples. If a husband is in a nursing home with a wife living in the community, Medicaid allows the husband to transfer their home to the healthy spouse, without imposing any ineligibility period. The house is then completely protected from the husband’s nursing home costs (even after the wife’s death). While planning can be more complicated for a single person, there are several options available to protect the house regardless of your marital status.
One strategy our office uses to protect homes from the Medicaid lien is an irrevocable trust. In order for a trust to be protected from Medicaid it must meet three requirements. First, it has to be irrevocable. This means that neither the Medicaid applicant, nor their spouse, can be able to revoke or change the trust in any way. Second, neither the Medicaid applicant nor their spouse can serve as trustee. Keep in mind that when Medicaid reviews trusts they are looking to see whether the applicant or their spouse retained too much control over the trust assets. For example, if the applicant or their spouse is named as trustee or can demand trust distributions they have too much power over the trust, and the home will not be protected. Lastly, the trust principal cannot be paid out to the Medicaid applicant or their spouse. The asset that is held in the trust is called the trust principal. The interest, dividends or rent earned on the trust is called the trust income. As an example, let’s assume you have your home deeded in an irrevocable trust and the house was then sold for $250,000. The trust could pay the interest earned on the funds to you but it cannot under any circumstances pay the $250,000 to you.
Another option to protect your house is with a Life Estate deed. With a Life Estate deed, a client is typically giving away their house to their children but is retaining certain rights of ownership over the property. Most commonly, clients keep the right to live in the house and the rights to rental income. They also still have an obligation to pay the house expenses. However, the house cannot be sold or mortgaged without everyone’s consent. The parents’ retained interest in the house is called a Life Estate. A child’s right to receive the property at death is called a remainder interest. Because a Life Estate deed passes automatically at death outside of probate, a Life Estate deed avoids Medicaid’s claim at death. One drawback to a Life Estate deed is that the house will only be protected as long as it is not sold until after the death of the Medicaid recipient. If the house is sold during the person’s life, a portion (this value is based on Medicaid’s actuarial tables) of the proceeds will pass to the Medicaid recipient and the funds will be taken by Medicaid. On the other hand, if the house is held in an irrevocable trust, all of the proceeds from the sale stay in the trust and remain protected regardless of when the house is sold.
Bring on the Medicaid Lien
In certain situations, it may make more sense to apply for Medicaid and let the Medicaid lien accrue against the house. Let’s consider a client who has $100,000 and a house worth $400,000. They spend down their funds in a year or so after entering a nursing home. At this point, they have two choices. First, they could sell the house and pay privately for their care until the funds are spent down. If the nursing home costs $10,000 a month, this will take about three years or so. Another option would be to apply for Medicaid once the funds are spent down. Remember, Medicaid will not count your house as an asset in determining eligibility if you indicate on your application that you intend to return home. Once the application is accepted, Medicaid will place a lien against the house and when the individual dies, the family will have to pay back Medicaid for benefits provided during that person’s life. You may be wondering, where is the benefit in this strategy? When you repay Medicaid, you are paying them based on what Medicaid pays the nursing home which is typically between 60 and 80 percent of the private pay rate. In other words, if you let the lien accrue you would pay back Medicaid at a rate of $7,000 a month compared with the $10,000 a month that you would have paid privately if you sold the house. Of course, if you receive Medicaid benefits over many years, the lien may exceed the value of the house and there would be no benefit to the family. (It’s important to note that regardless of the size of the lien, Medicaid is only entitled to the value of the house.) One other drawback to this strategy is that the Medicaid applicant cannot use their own income to pay for the house expenses (taxes and insurance). The only way to cover this cost is either to rent the house or for other family members to pay the bills.
Our clients work extremely hard their entire lives saving for their retirement and to pass along a little something for their children. Often, their home is their “nest egg,” representing a life time of hard work and savings. The best way to protect your home is to plan ahead. Given the State’s tightening budget, it has become even more difficult to obtain Medicaid eligibility and protect your home. For your own peace of mind, it’s more important than ever to hire an experienced Elder Law Attorney to create a comprehensive Asset Protection Plan to preserve all that you have worked for.
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