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Federal law allows states to recover money spent on behalf of the Medicaid beneficiary after that beneficiary's death. Recovery concentrates on what Medicaid considers an "estate." For most purposes, the only estate asset remaining at death is the personal residence.
Each state approaches recovery differently. In some states, recovery is only executed if the personal residence shows up in probate court. In these states -- there are only 13 of them left -- a simple family living trust would likely prevent recovery. In other states, the definition of estate is expanded to include trusts or life estates and virtually any other property in which the deceased person had an interest. Typically, the state will wait until the last death in order to place a lien against the property. If a community spouse is living in the home, the state will wait until after she dies before applying its lien. In many states, if the community spouse outlives the Medicaid beneficiary, the state will not attempt recovery at all and will simply ignore it.
A few states have adopted a federal lien procedure called a TEFRA lien. This allows the state to place a lien against the home as soon as his state starts paying for Medicaid costs. In these states, there is little that can be done to protect the home from recovery. These liens cannot be applied if the spouse is living in the home or if certain other entitled individuals are living in the home.
In all states, Medicaid recovery does not occur if the home is worth less than a certain minimum limit established by the state. Also, if recovery produces an undue hardship, no recovery occurs pending a "hardship hearing" with the state.
Almost all states allow the personal residence to abandoned if the Medicaid beneficiary signs "an intent to return home." There may be some long term restrictions on this intent, meaning that after a certain period of time some states may question whether the beneficiary really could return home and may require a doctor's examination to verify this.
The rationale for this rule is based on the idea that if a Medicaid beneficiary in a facility gets better, he or she has a place to live in. In many cases, it is wise not to sell the home if it is vacant but to either rent it out and allow the rental income to subsidize the facility costs or to simply leave it vacant or to have a family member live there free of cost. Sometimes, the recovery on the house is not significant enough to warrant selling it or perhaps the house can be refinanced to take care of the Medicaid bill and allow the family to retain ownership of the property.
For a single potential Medicaid beneficiary, transferring the ownership of the property to anyone other than the exempted individuals below will result in a penalty if Medicaid is applied for within five years of the transfer.
For a married couple, title on the property should be transferred to the community spouse -- the healthy spouse at home who is not receiving Medicaid. In a number of states, the non-Medicaid spouse can transfer the property solely in her name to someone else and as a result completely remove the home from recovery. In other states, this transfer will result in a gifting penalty for the nursing home spouse even though the nursing home spouse does not own the property. If the community spouse successfully transfers the home, this will still create a penalty for her with a five-year look back if she ever has to apply for Medicaid.
There are certain cases where the home can be transferred to someone else and it does not create a penalty. Here are the exemptions.
There are a number of strategies that can be used to protect the home from estate recovery. In those states that go after probate property only, anything that keeps the house out of probate will suffice. In other states, some common strategies include the use of irrevocable trusts or transfers before death. Most of these strategies involve giving away ownership of the home. This creates a penalty either for a potential Medicaid application or for someone already on Medicaid whose name was on the property. There are also a number of strategies to deal with this penalty. The reason for creating a penalty through an outright gift or a trust is to start the five-year look back. Another reason might be to get the property out of the name of an aid and attendance applicant.
Transfer of the property as a gift, thereby creating a penalty, can be reversed in almost every state. In other words, if the consequences of a Medicaid penalty outweigh the advantages of gifting the property, the title is changed back into the name of the Medicaid beneficiary in order to allow that person to receive Medicaid benefits. In case the Medicaid beneficiary is incapacitated, a proper durable power of attorney that includes gifting rights must be set up in advance while the person was competent to do this.
In many states, if the community spouse is alive after the Medicaid beneficiary dies, the state will not attempt recovery even after the death of the community spouse. The home is always protected from recovery as long as the community spouse is alive whether he or she lives in the home or not.
In those states that attempt recovery, the community spouse, if healthy, can employ a number of gifting strategies. This is because Medicaid cannot apply a lien against the house while the community spouse is alive and living in the home. This does not mean that if the state is entitled to recovery, it cannot pursue civil action. Whether this happens on a regular basis we don't know.
If the community spouse dies prior to the nursing home spouse, under state intestate laws, the nursing home spouse will inherit the home. If the home is solely in the name of the community spouse, then the home is not considered a personal residence by the nursing home spouse and the home is no longer exempt and will count as an asset. This will disqualify the nursing home spouse for Medicaid.
An attempt could be made where the home is solely in the name of the community spouse to create a will that disinherits the nursing home spouse. Unfortunately, states do not allow spouses to disinherit each other and require that irregardless of any prior arrangements, a surviving spouse has a legal right to an "elective share" of the assets. In some states, this could be a third of the amount or possibly one half of the amount or some other number.
There is also a problem in those states where the community spouse transfers the home to someone else and that counts as a disqualifying gift for the nursing home spouse. Thus any gifting arrangements prior to death would disqualify the Medicaid beneficiary.
An immediate and sudden death of the community spouse cannot be planned for. An anticipated death, due to declining health, can be planned for. Strategies for dealing with this potential problem need to be addressed by a qualified elder law attorney.
In those 13 states that only apply recovery through the probate process, any planning strategies that bypass probate will prevent recovery. This might include the use of a living trust or putting other people on the title in joint ownership with rights of survivorship.
It should be noted that if the state changes its definition of "estate" to include trusts, life estates or other arrangements, there has been typically no grandfathering allowing application of the previous rules. In other words, if the planning has been done to avoid probate and the state can now go beyond probate for recovery, little can be done to avoid this.
A properly structured irrevocable trust, meeting Medicaid requirements, that has title to the home, will avoid recovery. The problem is that transferring the home to the trust will create a penalty within the five-year period from the date of transferring title. The exception to this is in those states where the community spouse has sole title to the property and can transfer the home without affecting the eligibility of the nursing home spouse. On the other hand, the transfer of the property does create a penalty for the community spouse.
The home could be sold on a promissory note and this effectively changes it from an asset to a loan and it is no longer considered an impediment to Medicaid qualification. Payments from the loan must be used to offset the care cost of the Medicaid beneficiary. This strategy used to be a very common one prior to the Deficit Reduction Act. The new rules pertaining to promissory notes make this strategy much more limited.
The term of the loan cannot exceed the life expectancy of the Medicaid beneficiary. For example, for a 90-year-old this might only be five years. This would make the payments very large and potentially unattractive for the family who is buying the property. All payments through the life of the loan must be equal. In addition, the loan cannot be canceled at death but payments must continue throughout the term of the loan into the estate of the deceased beneficiary which would make them subject to recovery. In those states that use probate for recovery, Medicaid could be bypassed by naming a beneficiary of the loan payments other than the state. The loan must be non-assignable meaning it cannot be used as collateral for another loan or purchased outright for cash.
This is a very clever way to transfer ownership in the property without creating a gift and a penalty. This deed is not available in all states but works very well in the states that allow it. The concept is quite simple. The deed transfers ownership of the property at the death of the Medicaid recipient. Any transfer of the home by a Medicaid beneficiary or by the spouse of that beneficiary, while that beneficiary is alive, will create a penalty. In this case, the transfer creates a penalty as well. But because it is at the death of the Medicaid recipient, it is irrelevant that a penalty is assessed. The deed retains ownership in the home for the Medicaid beneficiary and as such it is not considered a gift and no penalty is assessed by creating a ladybird deed.
Gifting a personal residence prior to death or to sale by an owner who has resided in the home for at least two of the last five years results in a loss of significant tax breaks. If the personal residence is sold while the owners are alive, a lifetime capital gains exclusion of $250,000 for a single individual or $500,000 for a couple applies to the sale. Thus, if a portion of the exclusion has not been used previously, either $250,000 worth of equity or $500,000 is excluded from capital gains taxes of 15%. As an example suppose that a couple has established a basis in their home of $50,000 based on their original purchase price plus improvements and adjustment of any depreciation claimed for business use. Suppose that the home sells for $400,000. Without the capital gains exclusion, the couple would have to pay a capital gains tax of 15% of the difference between their basis and the selling price -- $350,000. This amounts to $52,500 in taxes. With the couples' exclusion there is no tax.
There is also tax relief if the children inherit the property at death. Instead of inheriting the basis in the property, the children will inherit the sale value of the property at the time of death. This is called the step up in basis and depending on when the property is sold, there is little if any capital gains tax due.
Any gifting strategies for the personal residence discussed in this manual, require a change in the title and this constitutes a gift to those persons on the title. Those persons receiving their portion of the value of the property by a gift lose the capital gains exclusion, unless they can establish personal residence by residing in the property for two of the forthcoming five years after their name is on the title. They also lose the step up in basis if they choose to sell the property outright.
The IRS recognizes certain irrevocable trusts called "grantor" trusts that if structured properly, can retain the capital gains exclusion and the step up in basis even though ownership has changed to the trust.