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!
Medicaid Asset Limits
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.
Protecting a House from Medicaid Estate Recovery
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 Medicaid 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.