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Your House Is NOT Protected from Medicaid

Q. My mom and dad built our family home in Arlington 35 years ago. It’s been remodeled twice and expanded to enlarge the kitchen and add a master bedroom suite. Our family still hosts frequent gatherings in the home for holidays and birthdays.

Mom and Dad had paid off the mortgage before Dad retired. So in addition to being the center of family life, the house had also become their biggest asset.

Mom always hoped the house would remain in the family when she and Dad were gone. She often talked about leaving it to me, as long as my wife and I promised to continue the tradition of hosting family and friends for holidays and birthday dinners.

Dad was diagnosed with Alzheimer’s two years ago. He is in the early stages, but we know his Alzheimer’s will inevitably get worse. We know that at some point in the future, we will most likely need to move Dad into a nursing home. With the high cost of long-term care, Mom knows their savings won’t last long. Dad would eventually need to qualify for Medicaid to pay the bills. Mom’s biggest question in all this, though, is “(w)ill I lose my home?” How can she plan ahead so she can afford the nursing home for Dad and not lose the family home? Thanks for your help!

A. For a great many people who need Medicaid benefits for long-term care, the home makes up most of their life savings. Often, it’s all a couple has to pass on to their children.

Because the home is the largest asset a couple can keep while still qualifying for Medicaid, it is also usually the main target of Medicaid estate recovery. Yes, the home is an exempt asset according to Medicaid, and it continues to be exempt so long as at least one spouse lives in the home. However, if your father goes into a nursing home and your mother dies, or also goes into a nursing home or any other type of long-term care facility, the property is no longer exempted because your mother would no longer be living in it, making the “exemption” only a temporary exemption, not a permanent exclusion. You don’t mention anything about your mother’s health, but even if she is completely healthy now, you never know when something might happen to her, so you can never count on the temporary home exemption lasting forever.

It is important to understand that the temporary home exemption does NOT equate to protection and that Medicaid estate recovery is ALWAYS a significant risk when it comes to the family home. Many people think that just because there’s a healthy spouse living in the house, it’s protected. But it’s not — these people are making an assumption that the healthy spouse is going to survive the Medicaid spouse, and that’s never guaranteed. Many so-called “healthy” spouses predecease the Medicaid spouse or wind up needing to leave the house to go into a long-term care facility or for some other reason.

The Home Is NOT Protected in Connection with Medicaid

It is a HUGE myth that most people think the family home is protected in connection with Medicaid. It is not. At best, as explained above, it is temporarily exempt.

Under federal and state law, Medicaid programs across the country are required to try to recover the cost of nursing facility stays and home and community-based services.

Medicaid recipients are often not told before they accept services that they can be required to reimburse the cost of those care services, even if that means losing their home.

Here’s how it works if you don’t take legal steps to actively protect your house:

  • As mentioned above, in most states, if you are married and your spouse is still living in your home, the home is temporarily exempted if you enter a nursing home, so you won’t be required to sell your home in order to qualify for Medicaid, but that doesn’t mean the house is protected, because there still exists the ever-present threat of Medicaid estate recovery as explained above.
  • In most states, if you enter a nursing home, even if you don’t have a spouse living in your home, the home is temporarily exempted by Medicaid (sometimes only for a short period of time, such as six months in Virginia) because Medicaid generally presumes that a nursing home resident intends to return home. In some states, the resident must affirmatively declare the intent to return home, and in some states, the nursing home resident must prove a medical likelihood of returning home. So even if you don’t have a spouse living in your home, you generally won’t have to sell your home in order to qualify for Medicaid, but again that doesn’t mean the house is protected, because the Medicaid estate recovery program in this situation is always required to go after the house, or the proceeds from the sale of the house, after the death of the Medicaid recipient. Also, an important caveat for this temporary exemption is that the resident’s equity interest in the home must be less than the state’s equity limit, which is either $636,000 or $955,000 depending on the state (and sometime in the area within the state). These equity limits are for 2022 and are adjusted annually for inflation.
  • In addition to Medicaid estate recovery, many states, including Maryland, put a lien on the house while the resident is living and attempt to recover the lien amount after the resident has passed away.

Protecting Your House from Medicaid Estate Recovery

As you can see, after a Medicaid recipient dies, the state must attempt to recoup from the person’s estate whatever benefits it paid for in terms of the recipient’s care. For most Medicaid recipients, their house is the only asset available. Luckily, there are steps you can take to protect your home:

Set up a life estate: For some people, setting up a “life estate” is a way to protect the home from estate recovery. But life estates are very complex and are subject to many varying rules in different states, and these rules change frequently. Generally:

  • A life estate is a form of joint ownership of property between two or more people.
  • They each have an ownership interest in the property but for different periods of time.
  • The person holding the life estate possesses the property currently and for the rest of his or her life.
  • The other owner owns what is called a remainder interest, meaning a current ownership interest but no ability to take possession until the end of the life estate, which occurs at the death of the life estate holder.

Life estates are created by executing a deed. In many states, once the house passes to the remainder beneficiaries, the state cannot recover against it for any Medicaid expenses that the life estate holder may have incurred.

Please note that any deed creating a life estate is an irrevocable transfer and exposes the house to lawsuits against all the owners. Another possible way to avoid estate recovery is a transfer-on-death deed, which is available in some states, but this is not ever guaranteed to work in connection with avoiding Medicaid estate recovery. At the Farr Law Firm, life estate deeds and transfer on death deeds are only done as part of Level 4 planning, which is much more complicated and therefore more costly than Level 3 planning.

Set up an Irrevocable Trust:

For most people, the best way to protect the family home from estate recovery is to transfer it to a properly-drafted irrevocable asset protection trust.

  • Trusts provide much more flexibility than life estates.
  • Once the house is in an irrevocable trust, it cannot be taken out again.
  • Although it can be sold, the proceeds must remain in the trust. This can protect more of the value of the house if it is sold, as the sale of the home while in a properly drafted irrevocable trust allows the settlor, if the settlor had met the residency requirements, to exclude up to $250,000 in taxable gain ($500,000 for a married couple), an exclusion that would not be available if the owner had transferred the home outside of trust to a child or other third party before sale.
  • If the house remains in a properly-drafted trust until death, then the beneficiaries of the trust will receive the house with a fully stepped-up basis for capital gains purposes, potentially saving hundreds of thousands of dollars in capital gains taxes when they eventually sell the house.

The Living Trust Plus® Is the Answer That Truly Protects the House

Irrevocable trusts can take on many forms and can be used to accomplish a variety of estate planning goals, but the most common goals of our clients are all accomplished by the Living Trust Plus, as follows:

The Living Trust Plus irrevocable asset protection trust protects your assets from probate PLUS lawsuits PLUS Medicaid eligibility after five years, PLUS Medicaid estate recovery, all while being completely tax neutral, thereby preserving the lifetime capital gains exclusion upon the sale of the home inside the trust and preserving the step-up in basis upon death. Even though the trust is irrevocable, the term irrevocable does not mean that the trust is set in stone and cannot be changed. On the contrary, if you establish a Living Trust Plus Asset Protection Trust, you can remain in control of the assets even though you are giving up ownership to the trust. Remaining in control means that you can change the trustees and change the beneficiary of the trust. Remaining in control also means, in most states, that you can serve as the trustee if you are still competent, which means that you can decide how the assets in the trust are invested, you can decide if and when to sell your family home, and you can decide whether and when to make distributions of trust financial assets from the trust to a named trust beneficiary (which cannot be you or your spouse) or to a charity of your choice, and you can decide the amount of any such distributions. The only power over the home that you give up is the ability to refinance a mortgage or take out a home equity loan, as traditional lenders will not lend money to an irrevocable trust.

The Living Trust Plus:

  • Enables you to qualify for government benefits: Assets that you own count against you for purposes of qualifying for certain government benefits, including Medicaid and Veterans Aid and Attendance. Even though you can control the assets inside of the Living Trust Plus, you do not own them.
  • The Living Trust Plus® functions much like a revocable living trust and maintains much of the flexibility of a revocable living trust, but protects your assets from the expenses and complexities of probate PLUS lawsuits PLUS the devastating costs of nursing home expenses while you’re living.
  • For many Americans over age 65, a Living Trust Plus® is the preferable form of estate planning because it includes asset protection for the person planning, and not just for that person’s children or other descendants. For purposes of Medicaid eligibility, this type of trust is the only type of self-settled asset protection trust that allows a settlor to retain control over the assets in the trust while also protecting the assets from being counted by Medicaid and by the Veterans Administration.

Whether you’re rich, poor, or somewhere in between, you cannot afford to ignore the potentially devastating costs of nursing home care and other types of long-term care, and you can’t ignore the potential that your house could be a target of Medicaid estate recovery.

If you’re a client or potential client who would like more information about the Living Trust Plus®, please call our office to make an appointment for a no-cost introductory consultation:

Fairfax Estate Planning Attorney: 703-691-1888
Fredericksburg Estate Planning Attorney: 540-479-1435
Rockville Estate Planning Attorney: 301-519-8041
DC Estate Planning Attorney: 202-587-2797

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About Evan H Farr, CELA, CAP

Evan H. Farr is a 4-time Best-Selling author in the field of Elder Law and Estate Planning. In addition to being one of approximately 500 Certified Elder Law Attorneys in the Country, Evan is one of approximately 100 members of the Council of Advanced Practitioners of the National Academy of Elder Law Attorneys and is a Charter Member of the Academy of Special Needs Planners.