Protecting the Home from Medicaid with a Life Estate

11 Comments

If a person qualifies to receive Medicaid assistance while in a nursing home, the patient need only contribute their Social Security and other income, and then the Medicaid program will pick up the balance of the bill. However, upon the death of the patient, the state wants to be reimbursed for every dime it paid to the nursing home on their behalf. In effect, the government has made an interest-free loan and now seeks repayment!

How can the estate of the deceased patient repay the state for these expenses? In order to qualify for Medicaid a person can only have $2,000 of countable assets. So upon their death, they will not have very much of anything in terms of resources to pay back the state, will they?

The key word above is "countable" assets. Since a home is an exempt (non-countable) asset, a person can indeed own a home (even possibly one that is worth more than $500,000) and still qualify. However, following the death of the recipient, the state will want to be repaid through the proceeds of the sale of that home.

However, many states only make a claim against the deceased's "probate" estate. That excludes property that passes to a named survivor automatically by law, such as certain real estate in joint names, joint bank accounts, life insurance policies, etc. Therefore, if the house passes outside of probate, then the state is out of luck in these states.

One popular method for avoiding probate of a house is simply to give it to the children outright. However, at that point the parent no longer owns the home. Should a child be sued, divorced or go bankrupt, the house could be lost.

A better solution is to give just a "remainder interest" to the child or children. In other words, the parent continues to own the house so long as they live, and only on the death of the parent will the child come into possession of the house. Meanwhile, because ownership passes automatically to the child, it does not pass under the parent's will—it is not probated—so the state cannot make a claim against the house (in those states that limit their right to recoup those payments to probate assets).

This can be accomplished by having the parent sign a deed transferring the house to one or more children, while retaining a "life estate." As owner of the life estate, the parent continues to have full control over and access to the house (although it cannot be sold without the child(ren) joining in on the deed). More importantly, it will continue to be classified as an exempt asset for Medicaid eligibility purposes.

Avoiding the Look-Back

The five-year period that precedes the date of your application for Medicaid is known as the "look-back" period.

The signing of such a deed will result in the parent making a gift to the child of the "remainder interest" in the house. The attorney who prepares the deed can calculate the value of the gift (it depends on the age of the parent making the gift). Because of this, it is important that the parent not apply for a period of at least five years to avoid the imposition of a very long penalty period.

Example: Parent, age 80, signs house over to child, retaining a life estate. For a person age 80, a gift of the remainder interest is valued at .56341. Thus, if the house is worth $300,000, the value of the gift will be $300,000 x .56341 = $169,023.

As you can see, this is not something that normally can be done when the parent is already in the nursing home and running out of funds. In order to avoid the imposition of the penalty as a result of the parent signing the life estate deed, they normally will need to wait at least five years to apply for Medicaid. Thus, they should have funds sufficient to cover nursing home expenses for at least that long. However, as an advance-planning technique it offers a great advantage of protecting the most important asset owned by the parent, the family home.

There are many other rules and planning techniques that can benefit individuals who are unsure whether they will have enough funds for long-term care when the time comes. The key is to plan and act now. Avoiding the topic or waiting until it is too late can be a very expensive dilemma.

K. Gabriel Heiser is an attorney with over 25 years of experience in elder law and estate planning. He is the author of "How to Protect Your Family's Assets from Devastating Nursing Home Costs: Medicaid Secrets," an annually updated practical guide for the layperson.

Visit Medicaid Secrets

View full profile

You May Also Like

Free AgingCare Guides

Get the latest care advice and articles delivered to your inbox!

11 Comments

Anna - Obamacare/Affordable Care Act is not responsible for having MERP - Medicaid Estate Recovery - done for those over 55. This is instead due to DRA - Deficit Reduction Act of 2005 - Bush era.

Medicaid is a joint federal & state program: managed by the state but within an overall federal guideline. Since 1993, the feds have had it such that all states need to have a recovery or recoup program for those getting Medicaid over 55 and not just for long-term care (NH) situations but for a whole range of Medicaid paid for programs, like mental health facilities, community based care programs, etc. Medicaid for those over 55 (as opposed to children/CHIP or mom's/WIC) is almost always an long term situation so costs are huge and continuous. Enforcement of any recoup was lackluster by the states; most states did little to no recovery at all.

When the DR signed into law by Bush in 2005, it required that the states ALL have a active recoup aka MERP of any available assets from those on Medicaid or their estates if over 55. DRA 2005 also allowed for states to have more flexibility in their management of Medicaid $'s.

DRA did a lot of things to change Medicaid: codifying the look-back period; changes to transfer of asset rules; transfer penalty imposed; availability of HCBS waivers; required attempt of recoup of payments. DRA since it is federal, had to be enacted by all the states in whatever legal system a state has for this. Some states did DRA in 2006 while other states dragged it out to 2010. All states are under Bush era DRA law now. Not Obama but Bush. Now ACA did expand NH availability to those considered "MAGI" (under 65, not disabled, no Medicare) to be able to get Medicaid funding for their NH care if deemed "medically frail". MAGI's medically frail do not have to do a resource test like over 65 Medicaid applicants.

The ability for recovery of Medicaid assets has always been an option under federal law for Medicaid since the 1990's. What is happening now and why MERP is coming on folks radar now, IMHO, is that the states are more & more outsourcing the MERP process. DRA allows the state to have more decisions as to how Medicaid is done. BTW the more Republican red-states are more going with outside contractors for MERP. 2 main companies doing this - HMS & PCG - and very very proactive in process. Their approach is more akin to a collection agency so very time-line driven and heavy on requiring documents for exemptions or exclusions. They get a % of the recovery. A very different approach than having a state employee on straight salary do a recovery.

Medicaid is an "at-need" entitlement that you apply for so if you go that route, the rules are what they are. Medicaid is not like SS or Medicare that you have been paying into.

If you want to keep your parents home, either never apply for Medicaid; or do long range planning (get Heisers book if you don't understand what this means) OR look carefully at the MERP exemptions and exclusions for your state and how your states probate laws work to see what options are for your situation and do whatever to have those work to get a release of MERPs claim or lien in accordance with your state laws on probate &/or MERP rules. Again DRA 2005 was Bush era not Obama.
In these type of articles explaining legal matters, please stress that every State has different rules and people should check with an attorney in their State. For instance, in Maine we do not utilize life estates; instead we do "life tenancy agreements" based on Maine's regs. Also, in Maine the exemption is $2000 but also an additional $8000 in liquid assets. Thank you, RK, attorney in Maine
As always terrific information from Heiser. The legalities & MERP recoup are considerations. But family need to also really consider if keeping "maw-maw's" house is financially feasible for them once maw-maw's goes into a NH & her funds are almost completely required to be her Medicaid required co-pay. Family need to clearly take a hard look at all the costs on the home and if feasible for their wallet for however long their elder is alive. To me, whether house is in LE,"Ladybird Deed", or caregiver MERP exemption mode, if the $ isn't there to maintain the house, all the planning doesn't matter.

If you afford 2nd or 3rd home, then dealing with maw's house is probably not a budget buster. But what seems to happen is family is all "govmint not gonna take maws house" at the beginning but realistically cannot afford home so @ year #2 when taxes & insurance come due & some family are over cutting the grass (or whatever they promised to do)....that the house ends up getting sold.