Preserving Your Primary Residence
The purpose of this article is to discuss methods for preserving the value of your primary residence against the high cost of nursing home expenses, by ensuring that the value of your primary residence passes to your heirs, in the event you qualify for Long Term Care (LTC) Medicaid. In addition to a brief description of each option, this document addresses the potential concerns raised by each option.
Primary Residence Preservation Options
Transfer the Home to the Healthy Spouse - If spouse “one” is institutionalized, he or she may transfer the home to the healthy or “second” spouse without a LTC Medicaid penalty period of LTC Medicaid ineligibility.
Concern: If the healthy “second” spouse becomes institutionalized shortly thereafter and qualifies for LTC Medicaid, a lien will be placed on the home. Upon the death of the “second’ spouse or sale of the property, the state will recover against the estate for the cost of nursing home expenses paid for the ‘second” spouse.
Private Long Term Care (LTC) Insurance – State approved private LTC insurance plans allow you to retain ownership of your primary residence, enter a nursing home, qualify for LTC Medicaid and the state allows the heirs to inherit the home. As of March 15, 1999, the minimum state approved LTC insurance policy of $125.00 per day for a two-year period prevents the state from recovering against the holder’s primary residence.
Concerns: Expense of the LTC insurance. Once purchased, the policyholder must be able to afford to pay the policy’s annual premium. In addition, the state can raise the daily rate, thus increasing the annual premium.
Deed the Home to your Heirs and Retain a Life Estate - A life estate ensures your right to live in the house for the rest of your life. You may deed the remaining interest in the house to your heirs during your lifetime. Based on your age, the Internal Revenue Service establishes the value of your life estate. This means you then own a percentage of the house, known as a life estate. Your heirs own the remainder of the house. Should you decide to rent the home, you are entitled to the rent. Should you qualify for LTC Medicaid, the state will place a lien on the property. If your heirs retain the house until your death, the life estate is extinguished and the house passes outright to the children without the state recovering any medical expenses against the value of the house.
Moreover, an individual may purchase a state approved LTC insurance policy for the five years of Medicaid ineligibility which would permit the children to deed back the property if you require nursing home care and desire to qualify for LTC Medicaid.
Concerns: The timing of such a conveyance is a concern. An individual entering a nursing home cannot convey his “remaining interest” in his property immediately and become eligible for LTC Medicaid. Effective February 8, 2006 the State “looks back” on a conveyance that occurred within 60 months This means the home can only be protected against nursing home expense if it is deeded out prior to 60 months of entry into a nursing home or the individual has enough moneys to pay for care until month 61.
Also, if an individual conveys a remainder interest to his heirs, should he desire to sell the home during his life, his heirs must agree to sell their remainder interest in the home. If the home is sold, he is entitled only to the percentage of the proceeds represented by the value of his life estate. The individual may owe no capital gains taxes on his life estate. However, the individual’s heirs will most likely be obligated to pay capital gains taxes on the difference between the parent(s) original cost (percentage of ownership) of the home and the amount they receive from the sale. Furthermore, as title to the home passes to the individual’s heirs, their creditors can attach a lien to the remainder interest. In addition, the individual’s heirs must claim the “remainder interest” as an asset if their children apply for financial aid for college and this may possibly disqualify the child from financial aid.
Lastly, IRS regulations provide the remaindermen to replace the original cost basis with the fair market value of the house if the life estate tenant dies and the property has not sold.
Irrevocable Trust With a Life Estate - Placing the home in an irrevocable trust enables you to live in your home for life. It may also prohibit the trustee from selling your home during your lifetime. A properly drafted trust will also prevent your heirs’ creditors from attaching a claim.
Concerns: If you need to qualify for LTC Medicaid, the state will “look back” sixty months from the date you convey the property to the trust to assure you are eligible for LTC Medicaid. Unless you have sufficient liquid assets to privately pay during the 60-month ineligibility period you may not be able to put the home in an irrevocable trust, as there will be no money for private pay.
Transfer the home to a sibling - A sibling who has an ownership interest in the primary residence of LTC Medicaid applicant for greater than a year and proves this is his or her primary residence may have the property conveyed outright without a disqualifying transfer for LTC Medicaid eligibility purposes.
Concerns: Often times siblings who live together for many decades want to leave the property to the surviving sibling, however, if the first sibling who gets sick, desires to convey her share of the property to her child or children, there is no legally binding guarantee obligation for the surviving sibling to convey such one half of the property to the sick sibling’s child or children after the sick sibling qualifies for LTC Medicaid or upon death of the surviving sibling.
Transfer the home to a disabled child - An individual who is institutionalized may transfer the primary residence to a disabled child without a LTC Medicaid penalty period.
Concerns: The individual may have more than one child he or she desires to distribute the primary residence to or quite often, the disabled child cannot afford to keep the primary residence, and must sell it thereby disqualifying the special needs child for financially based public entitlement programs.
Except for the first two options, you would be transferring an ownership interest in your home, and thus losing some or all of the equity in the home.
A decision to lose a portion of the equity in your home should not be taken lightly. When conveyances of the property occur, the LTC Medicaid ineligibility period is now five years. You must make plans to cover the costs of nursing home care privately for the remainder of the financial penalty period for such a conveyance. One provision may be to purchase a minimum LTC insurance policy for at least the duration of the penalty period.
Information provided by: Patricia Mello & Associates, P.C., Attorneys at Law
Consult an elder law attorney knowledgeable in Medicaid law for detailed
information on these and other asset protection strategies.