12 Sep Medicaid and protecting your home
Q. Like most people, my largest asset is my home. If I am in a situation where my long term care insurance is exhausted and my other assets begin to be drawn down to pay for my care, is there a way to protect my home from being taken?
— Protecting my assets
A. The fact that you purchased long-term care insurance shows you’ve done some planning for your older years.
That’s important, but it’s also important to periodically review and revise your plan as your circumstances change.
Now would be a good time to seek a consultation with an estate planning/elder care attorney to plan for your individual circumstances as well as have your will, general power of attorney, advance health care directive or other estate planning documents reviewed or prepared, said Catherine Romania, an estate planning attorney with Witman Stadtmauer in Florham Park.
That said, let’s look at Medicaid, which Romania calls a welfare statute.
“It has both income and asset limitations requiring a recipient to become impoverished in order to qualify,” she said. “For purposes of Medicaid eligibility, your primary residence is an exempt asset as long as you or your spouse, if any, reside in the house or intend to return to the house to reside.”
But, she said, Medicaid does have an automatic lien on any interest in a residence in your name equal to the amount of Medicaid funds received by you and will execute on such lien upon the earlier of the sale of the home or death — unless your spouse remains an owner of the residence.
For example, Romania said, if the deed is wholly in your name so the house is in your probate estate upon your death, the Medicaid lien automatically attaches to the home upon your death. However, if your only interest in the home was a life estate, which is a right to live in the home for the rest of your life because you properly – and not fraudulently – transferred the remainder ownership of the home by sale or gift, then because your life estate is extinguished upon your death, nothing remains on which Medicaid can attach, she said.
In order to prevent individuals from merely making gifts of their property in order to qualify for Medicaid, there is a penalty imposed on transfers made within five years of applying for Medicaid, Romania said. The penalty is the number of months which a person will be ineligible for Medicaid.
“The penalty is determined by dividing the value of the assets transferred by the state’s Medicaid average monthly cost of a nursing home,” she said. “The penalty period begins to run only after an individual enters a nursing home and would otherwise be eligible for Medicaid and not at the time of the transfer.”
Romania said during the penalty period, Medicaid will not pay for the nursing home and private funds must be used. Exceptions can be made for undue hardship but such exceptions are difficult to obtain.
There is also an exception for the transfer of a residence to a child who has lived in the house for at least two years prior to the applicant entering a care facility and who during that period provided the applicant care and services that enabled the applicant to live at home, she said. If that is the case, the transfer of the house to the child will not result in a penalty and the house will later not be subject to a Medicaid lien.
Gifts, as well as sales to the extent they are less than fair market value, within five years of applying for Medicaid are subject to a penalty, Romania said. However, before a transfer is made, in addition to the Medicaid transfer penalty, income tax considerations must be considered as they may significantly impact either you or the transferee and therefore your decision on whether you gift or sell your house or whether you maintain a life estate which is extinguished at death. Additionally, Romania said, before any transfer is made, approval of the mortgage holder, if any, must be obtained.
“If there is no mortgage on the home, another option to consider is a reverse mortgage,” Romania said. “A reverse mortgage allows you to withdraw the equity in the property with the loan being paid back at death or once the property is permanently vacated.”
Romania said Medicaid is a complicated and constantly changing area, so be sure to speak with a professional who is updated on all the rules that may impact your decisions.
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This post was first published in September 2016.NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.