If a person qualifies to receive Medicaid assistance while in a nursing home, the patient need only contribute their Social Security and other income, then the Medicaid program will pick up the balance of the bill. However, upon the death of the Medicaid patient, the state will want to be reimbursed for every dime it paid to the nursing home on behalf of the patient. In effect, the government has made an interest-free loan and now wants to be repaid!
But how can the estate of the deceased patient repay the state? In order to qualify for Medicaid a person can only have $2,000 of countable assets. So upon their death, they won’t have very much of anything 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’s worth more than $500,000) and still qualify for Medicaid. However, following the death of the Medicaid recipient, the state will want to be repaid out of the proceeds of a 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. So 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. But then 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 Medicaid payments to probate assets).
This is 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). Importantly, it will continue to be classified as an exempt asset for Medicaid eligibility purposes.
Avoiding the look-back
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 Medicaid 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.