Tactic No. 1 (Exempt Transfers in Wyoming)
Some transfers are exempt from Medicaid penalty. There are general exemptions that apply to any transfer, and other exemptions that apply only to the transfer of a residence. First, the “General Exemptions.”
General Exemptions from Transfer Penalties
The transfer of assets without fair consideration will not create a period of ineligibility for Medicaid under any of the following conditions:
Intent to Receive Fair Market Value
The Medicaid applicant can show that he or she intended to dispose of the assets at fair market value.
Purpose Other Than to Obtain Benefits
The Medicaid applicant can show that the assets were transferred exclusively for a purpose other than to qualify for Medicaid.
To the Spouse
The assets were transferred to the Medicaid applicant’s spouse or to another for the sole benefit of the applicant’s spouse.
To a Minor or Disabled Child
The assets were transferred to the Medicaid applicant’s child who is under 21 years of age, or to a child of any age who is blind or permanently and totally disabled (based on SSI criteria), or to a trust solely for the benefit of such child.
To a Trust for a Disabled Person who is under age 65
The assets were transferred to a trust meeting certain criteria which was established solely for the benefit of an individual who is under 65 years of age and who is disabled (based on SSI criteria).
Exemptions Applicable Solely to the Transfer of a Residence
In addition to the general exemptions described above, the law contains a number of other exemptions that apply solely to a transfer of the residence. If the transfer of the residence meets one of the following exemptions, no period of ineligibility is imposed:
The transfer of the home is to the applicant’s child who resided in the property for two years prior to the parent entering a nursing home and who provided care during the two-year period that permitted the parent to stay in the home rather than a nursing home.
Sibling with Equity
The transfer is to a sibling who has an equity interest in the home and who lived in the home for at least one year immediately before the applicant entered a nursing home.
Medicaid estate recovery applies to your home and any other assets that you own at the time of your death. Estate recovery no longer applies if you have transferred your home away during your lifetime using one of the above exemptions.
As a result, the various transfer exemptions described above provide plenty of opportunity to protect the home from loss to the government’s Medicaid estate recovery program.
Tactic No. 2 (The Home Protection Trust)
Another option is to deed the home so that it is owned by a trust rather than being owned by a child. [The term trust describes the holding of property by a trustee (one or more persons or a trust company or Bank) in accordance with the provisions you create in a written trust instrument.
Using a trust, your property can be protected from estate recovery when you die, even after a long stay in the nursing home. And since your child is not the owner of the property it is protected from any bad things that may happen in your child’s life as well.
A trust allows you to protect your real estate (and other assets if you wish) from long term care costs while avoiding the risks and negative consequences of outright transfers to children. By transferring the home and other assets into a properly designed trust, you can still reserve some interest in and control over the transferred assets – advantages that are not available when transfers are made outright to a child.
For example, the medicaid asset protection trusts will normally provide that you have the right to reside in the home for the rest of your lifetime. No one can throw you out or ask you to pay rent. You still own the home for tax purposes, so you can still deduct the taxes, and claim any property tax rebates. You can claim the residential exclusion from income tax if the property is sold during your lifetime. And your heirs can get a step up in tax basis if the property is sold after you die, which avoids or limits any income taxes they might have to pay.
The Trust Can Protect More than just your Home: Investments such as stocks, bonds, bank accounts, and life insurance policies are also commonly protected through the use of this kind of trust. Because more than just your home can be protected this type of trust is given different names. You will hear lawyers sometimes refer to it as an IIOT, learn more about IIOT tax consequences here.
Who can be a trustee?
People often name one or more of their children as trustees - this is kind of like naming someone in a power of attorney or an executor in a Will - the trustee doesn’t own the assets of the trust, they just manage them according to the terms you set up in the trust. While most people name one or more family members as the trustee, you can also name a professional trustee like a bank. In any event, you can include a provision in your trust that allows you to fire the trustee and appoint a new one at any time. (I like to call this the Donald Trump “You’re Fired!” power).
This is Not your standard Revocable Living Trust. It’s important to note that a Home Protection Trust is very different than the standard revocable “living trust” that many people have already set up. A revocable living trust does not protect your assets from nursing home costs.
The Home Protection Trust is an irrevocable trust specifically designed to protect its holdings from loss if you ever have to apply for Medicaid to pay for your long term care costs.
When you transfer the things you want to protect to the trust you don’t have to sell them. You don’t have to change your investments. What you own now is merely moved under the protective umbrella of the trust. The trust can sell things held by it, and buy new things. If your home is held under the trust, and you decide to move, the trust can sell it and buy a new one.
I’ve created many of these trusts for my clients, including some of my own family. Most people don’t even notice the trust once it has been set up. It changes things just enough to protect your assets from nursing home costs, from issues with your children, and from the risks involved when a surviving spouse remarries.
This Requires Planning in Advance: Because the Home Protection Trust involves the transfer of property for Medicaid purposes, Medicaid’s five year look back period rule on gifts applies. This means that it is best if you can create and fund your trust at least five years before either you or your spouse are likely to need to apply for Medicaid.
In general, you have many more options if you plan well ahead of any illness. Don’t wait for a crisis to happen. With expert advice you can still plan and protect some assets even after a crisis has hit. But because of the Medicaid five year rule regarding gifts, many more options are available when you plan well in advance of any need for Medicaid. There are also, as always, tax implications that need to be thought through. Don’t Try this without Expert Help from an Medicaid Planning Attorney who knows the laws in your state.
For Further Information: An article in the Wall Street Journal discusses the Home Protection Trust. The article calls it an irrevocable income only trust, because more than just the home can be protected. Here is a link to the Wall Street Journal article: Solving Medicaid Assets Math: Trusts Can Be Used To Pass On a Home; Annuities for Income . See also the follow up Wall Street Journal article: Answers on Medicaid Vary State by State.
Tactic No. 3 (The Life Estate Deed)
A life estate deed is a way you can give your home to your children while you are alive but retain rights and control over it during your remaining lifetime. For example, you deed your home to your children, but the deed provides that your keep the right to live in the home for the rest of your life. You may also retain various other controls over the property.
In many states, the home will pass to your children on your death without going through probate and without being subject to Medicaid Estate Recovery. There are many types of life estate deeds. The variations include revocable deeds which allow you to sell the home without your children’s approval, and irrevocable deeds where you no longer have the ability to sell the property without your children’s consent. These variations and their numerous sub-types can have vastly different consequences in terms of Medicaid.
Seniors sometimes do a life estate deed to a trust rather than directly to their child or children. The trust can offer protection from creditors of your child, or marital problems, or the possibility that your child may predecease you. In my opinion, the life estate deed to a Home Protection Trust is an underused planning tool. It can protect your home while providing you with important flexibility to deal with whatever unforeseen changes might occur in the future.
Another variation of a life estate deed involves the senior buying a life estate interest in their child’s home. In the right circumstances this planning option can allow you to protect financial assets and qualify for future Medicaid benefits more easily. But special Medicaid rules apply to the purchase of a life estate in a child’s home and tax consequences must be carefully considered. Do not make these medicaid mistakes.
Other Issues To Consider
As with so many aspects of Medicaid law, what seems simple on the surface can get very complicated. Many issues other than avoiding estate recovery need to be considered before you sign a deed to your home. For example, a life estate deed can be treated as a gift which can create a lengthy ineligibility period for needed Medicaid long term care benefits. (There are ways this problem can be addressed - such as having the deed transfer take place more than 5 years prior to the application for Medicaid). Avoiding tax complications can also be an important issue.
The life estate deed is a very common planning device that seniors frequently use to protect their homes from the cost of long term care. It’s a planning tool to consider if you are worried that the state will take your home.
But you don’t want to do a life estate deed without getting expert advice from an elder law attorney who understands the Medicaid qualification and estate recovery rules in your state. An experienced elder law attorney can help you sort through the options and determine which option is best for you and your family. Click here to return to our page on Irrevocable Medicaid Trusts and learn how to protect your assets from Medicaid.