Often the family home is the largest asset in an individual’s or couple’s estate. Many are aware that the home is an exempt asset for the Medicaid application when the other spouse continues to live in it, but it is also the main target of Medicaid estate recovery.
Medicaid estate recovery is the process where Medicaid programs attempt to recover the costs paid to patients of nursing home facilities, home-based services and other community-based services. Many applicants are not aware when they apply that Medicaid will seek reimbursement. This reimbursement comes in the form of filing a claim against your estate after you pass away.
This can become very problematic if proper planning was not done. Many people lose their homes to Medicaid estate recovery. There are ways to prevent this from happening. As mentioned earlier, a home may be temporarily exempted in order to qualify for Medicaid if the other spouse continues to reside there. It may also be temporarily exempted for individuals who may return to the home after their stay in a nursing home. The individual must notify Medicaid of his or her intent to return home and show a likelihood of it being a medical possibility.
To qualify for this temporary exemption, the equity in the home must be lower than the requirements for that particular area of the state. Each year this amount is adjusted for inflation. Medicaid may place a lien on the property while the person is still alive and attempt to recover the lien amount after the person dies.
So how can someone prevent Medicaid from seeking to recover the house after they pass away?
Strategy #1: Set up an Irrevocable Trust. A properly-drafted irrevocable trust can be created and the title of house can be deeded over to the trust. Once the house is in this trust, it cannot be returned to the grantor. The house can later be sold, but the proceeds from the sale must remain in the trust. This strategy has the added tax advantage of utilizing the primary residence exclusion to exclude up to $250,000 ($500,000 for married couples) of the sale proceeds in taxable gains. If the house remains in the trust until the grantor dies, the beneficiaries of the trust receive the house with a step-up in basis.
Advantages of the Irrevocable Trust Strategy:
- The assets contained in the trust bypass probate.
- The grantor can apply for Medicaid after the 5-year period has passed.
- The home is protected from Medicaid Estate Recovery.
- The grantor of the trust still has the power to change the trustee and if competent, serve as the trustee.
- The grantor can change the beneficiaries named in the trust.
- The assets in the trust are protected from lawsuits and creditors.
The main limitation to consider is that the grantor gives up the power to refinance the home or take out an equity line of credit.
Strategy #2: Create a Life Estate. Execute a deed that conveys the interest in the home jointly to two or more people. Each has ownership in the property at different times. The grantor retains the right to live in the home for the rest of his or her life. The other owner has a remainder interest in the property and can only take possession at the grantor’s death. Again, this transfer is subject to Medicaid’s five-year lookback period.
If protecting your family home is a priority for you, then reach out to the experienced estate planning attorneys at Stouffer Legal right away. Keep in mind that this has to be completed at least five years prior to applying for Medicaid.
You can schedule an appointment by calling us at (443) 470-3599 or emailing us at office@stoufferlegal.com.
