Protecting your House from Medicaid Estate Recovery

Realities of Long-Term Care

According to the National Institute on Aging, the number of people aged 65 and older is expected to skyrocket due to increased life expectancy and the aging baby boomer generation.  Most studies show that about 50% of all people will need some type of long-term care at some point in their life.  The Department of Health and Human Services estimates that this number rises to 70% for people over the age of 65.

About 50% of older adults use Medicaid to help cover long-term care expenses.  Long-term care expenses account for 70% of the total Medicaid expenses used nationwide.  Proper Medicaid planning goes beyond preserving assets while still qualifying for Medicaid.  It also involves ensuring that assets continue to be protected after a Medicaid recipient passes away.  Careful planning will ensure that your most valuable asset, your home, passes to who you intend and is out of reach for the government to collect against.

What is Estate Recovery?

After a Medicaid recipient dies, states are required to attempt to recoup from his or her estate whatever benefits it paid for certain Medicaid benefits.  This is called "estate recovery" and each state sets their own rules and procedures for recovery.  People are typically frustrated to learn that the assets they worked to protect to become eligible for Medicaid can still be seized by the government upon their death.  Fortunately, there are steps that can be taken to keep the home protected, which is often the most valuable or only available asset for Medicaid recipients.  Some common strategies are described below. Each strategy requires careful planning to ensure its intended purpose is achieved.

Life Estate Deeds

A life estate deed is a common tool used to protect the home from estate recovery.  This strategy can be simple or complex, depending on whether the property interest is purchased for fair market value or gifted away.  A life estate deed creates a form of joint ownership of property between two or more people.  The Medicaid recipient, or life estate holder, would possess the home through their lifetime. The other party would obtain a remainder interest in the home.  A remainder interest in real property is the right to own and possess the home upon the death of the life estate holder.  By having another party possess a valid ownership interest in the home, Medicaid is unable to infringe upon the remainder interest holder’s right to the house and is therefore unable to recover from the house.

An example of this is a mother giving a remainder interest in the house to her son while maintaining a life estate. Thereafter, the mother retains the same rights as before and can live on and use the property as desired. The mother is still responsible for the costs of the home and property taxes. 

Upon the death of the mother, the house will not go through probate.  The house will instead automatically transfer to the son who holds the remainder interest.  Therefore, in states that limit estate recovery to the recipient’s probate estate, the house will not be available.  Further, in most states that allow for recovery beyond the probate estate, the state is still unable to recover from the house because of the son’s ownership interest.

The issues with this strategy depend on how the remainder interest is transferred.  Medicaid’s five-year lookback period applies to transfers of real property.  Therefore, a remainder interest must be purchased for fair market value in order to avoid a penalty period for Medicaid eligibility.  While the remainder interest is typically much more affordable than the fair market value of the house, not every Medicaid recipient has a close family member or trusted person that is able to make the purchase for fair market value.  If a remainder interest is instead gifted within the five-year look back period, there will be a penalty period for Medicaid eligibility.  This will require additional planning to ensure the Medicaid applicant still receives proper medical care and becomes eligible for Medicaid as soon as possible.

Trusts

In most states where estate recovery is limited to the probate estate, titling the house to a revocable living trust will keep the house out of the probate estate and protect it from estate recovery.  However, some states that appear to be probate only states have created exceptions in an attempt to still recover from a house in a revocable trust. 

Another method of protecting the home from estate recovery is to transfer it to an irrevocable trust. Irrevocable trusts can be complicated but they are the main tool for proactive Medicaid planning.  Once the house is in the irrevocable trust, it cannot be taken out again.  If the house is sold, all proceeds from the sale must remain in the trust and cannot be accessed by the grantor of the trust.  While the grantor cannot “access” trust property in an irrevocable trust, the grantor can still name beneficiaries of trust property and put conditions on transfers.  A properly funded irrevocable trust will re-title the house to the irrevocable trust and will no longer be in the name of the grantor.  While this will protect the house from Medicaid’s estate recovery, all transfers to an irrevocable trust will still be subject to Medicaid’s five-year look back period.

Other Considerations

While each state makes its own estate recovery rules, federal law prohibits any state from recovering from the estate of a deceased Medicaid recipient who is survived by a spouse, a child under the age of 21, or a blind or disabled child of any age.  States are also required to establish procedures for waiving estate recovery when recovery would cause an undue hardship.