Protecting Your Home From Medicaid Claw back Last Updated January 28, 2018
Table of Contents:
- How does it work?
- Who is it for?
- How do I begin protecting my home?
Although it may be your most valuable asset, owning a home will not disqualify you from receiving Medicaid. You do not have to sell it to pay for medical care prior to receiving Medicaid. However, every state has an "estate recovery" program in which, following death, the value of your home may be used to reimburse the state for the Medicaid funds it provided. In order to protect your home from estate recovery, you will need to employ one of several strategies.
"Protecting the home" means ensuring your home stays within your family after death, by sheltering it from your state's estate recovery program.
Note that only one home is a "non-countable" asset (not counted when applying for Medicaid). If you own two or more houses or condominiums, each of them beyond the first will be considered a "countable asset" and therefore will impact your Medicaid eligibility. Additionally, the home will likely be a countable asset if it is outside the state in which you are applying for Medicaid.
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How does it work?
There are several strategies for protecting your home from estate recovery. The optimal one depends on your particular circumstances and the state in which you reside. Each state determines its own estate recovery rules, and each strategy comes with its own benefits and caveats. Professional advice from a Medicaid expert is essential.
Below are some potential strategies to protect your home. Note that not all of these are available in every state.
The word "child" is used here simply because adult children of the Medicaid recipient are typically the people involved, but it could be any person or number of people.
Transfer to a Child
In order to protect your home from estate recovery, you will need to ensure that you have no "interest in the home" (ownership under your name) at time of death. The most obvious solution to this would be an outright transfer to child, in which you simply sign over your home to one of your children. However, this is problematic for a number of reasons.
First, the transfer would be considered a "gift" for Medicaid purposes, and any gift you've given over the "lookback period" (the 5 years prior to Medicaid application) is subject to a Medicaid "penalty period," which delays your Medicaid eligibility.
Second, since your child would own it, your home would be subject to any claims made against your child, and therefore could be taken from you if your child becomes divorced, is sued, or files for bankruptcy.
Partial solutions to these problems can be found with a transfer to child but keep life estate strategy, in which you transfer the deed of your home but retain the rights to it while living, or by adding a child to the deed, in which you sign over a portion of your home's value to your child and retain the rest.
Note that a transfer of the home to a child is also subject to applicable taxes.
Transfer to a Trust
An alternative strategy is to transfer your home to a trust, which comes with the same "gift" caveat as a transfer to child, as well as its own tax considerations, but avoids the complications of ownership described above. Similarly, it could be done either through an outright transfer to trust or a transfer to trust but keep life estate.
"Lady Bird Deed"
One particular transfer-of-home strategy called a "Lady Bird Deed" is especially powerful, as it solves both the gift problem and the ownership problem, while also avoiding many tax considerations. With the Lady Bird Deed strategy, you transfer the home to your child but keep the life estate rights, including the unlimited right to sell the home. The "right to sell" stipulation means that the transfer is not considered a gift to your child, because you can still sell it to someone else, which would then revoke your child's right to ownership. Assuming you never sell it, your child would gain ownership immediately upon your death, at which point your estate no longer owns it and therefore it cannot be subject to estate recovery.
A Lady Bird Deed is an "Enhanced Life Estate Deed" or a "Transfer On Death (TOD) Deed" that allows you to transfer your home without penalty while still maintaining your rights to it and sheltering it from estate recovery.
While a Lady Bird Deed may be the ideal solution to protecting your home, there are important caveats to using this strategy, the most crucial being that it is only possible in the three states (Florida, Michigan, and Texas) that explicitly allow it and do not have an expanded definition of "estate" that accounts for this kind of deed transfer.
However, "Transfer on Death" deeds that accomplish the same objectives are allowed in any state that has enacted the Uniform Real Property Transfer on Death Act (URPTODA). As of 2017, the act has been passed by 13 states (Alaska, Hawaii, Illinois, Nebraska, Nevada, New Mexico, North Dakota, Oregon, South Dakota, Texas, Virginia, Washington, West Virginia) plus Washington D.C., with legislation pending in 3 more states (Connecticut, Tennessee, and Utah).
Additionally, a similar law that allows this type of deed has been passed in Indiana (in 2009).
These state laws are constantly evolving, so professional advice from a Medicaid expert with knowledge of your state is necessary.
In some states, transferring a small portion of home ownership (such as 1%) to your child can be an effective strategy. This works because the "gift" incurs a penalty period based only on the 1% of ownership transferred, so the penalty period is short, and the entire deed transfers to the 1% owner upon the primary owner's death, thereby avoiding estate recovery. This strategy works well in North Carolina and Colorado. .
Using the Child's Home
If you are planning to live with your child, one way of protecting your home's value is by selling it and using the money towards your child's home, either by purchasing life estate in your child's home or by purchasing joint interest in your child's home. Since your child's home would be your home, you are effective spending the money on your own home and therefore the transfer of money is not a gift. And since your child becomes the sole owner after your death, the home at that point will no longer be part of your estate and therefore not subject to estate recovery.
Transfer to a Caretaker Child or Resident Sibling
If your child lives with you and provides care to you, you may may be able to sign the home over to him or her without a gift penalty. This transfer of home to a caretaker child is exempt from the gift penalty only if (1) the home was the child's sole residence for the past two years and (2) the child provided care to you that otherwise would have necessitated your being in a nursing home. This can be an effective option with advanced planning and a "caregiver agreement," which documents the care service.
If a sibling lives with you, you may also be able to transfer the home with no gift penalty. A transfer of home to a resident sibling is exempt from the gift penalty only if (1) the home was the sibling's sole residence for the past one year and (2) the sibling has an existing "equity interest" (partial ownership, even 1%) in the home. Caregiving is not required.
Additionally, if you have a child who is under age 21 or is blind or disabled, signing the home over to him or her is exempt from the gift penalty as a transfer of home to a minor, blind, or disabled child.
The Half-a-Loaf strategy, in which a portion of your home is transferred to a family member, can also be an effective strategy to protect at least part of your home's value from estate recovery.
Who is it for?
If you own a home and want your family to retain its value following death, then one of the above strategies will likely benefit you. The optimal strategy will depend largely on your state of residence.
"Transfer on Death" deeds like the Lady Bird Deed are particularly useful for unmarried or widowed Medicaid applicants who have few assets aside from the home. It can be a powerful strategy if your state allows it (see "Lady Bird Deed" section above).
Remember that any home beyond the first, or any home outside the state in which you're applying for Medicaid, will likely be a countable asset. The above strategies to protect them will not apply.
How can i take advantage?
Protecting your home should be considered part of your overall Medicaid strategy, and must take into account your other assets and income. Consulting with a Medicaid expert is crucial, as the above strategies require knowledge of your state's rules governing estate recovery, property deeds, assets, capital gains, mortgages, taxes, and Medicaid. A Medicaid expert can also explain how to use your home to become eligible for Medicaid sooner by converting your countable assets to non-countable.