Q: I want to give my home to my children now and yet continue living there for as long as possible. Will I still be eligible for Medicaid if I need nursing home care in the future?
A: You might be able to accomplish this by transferring your home to your children with a life estate deed. This gives you the right to live there for the rest of your life. For most purposes, you continue to be considered the owner of the home. For example, you would still be responsible for the payment of taxes, insurance and maintenance.
To determine whether the life estate deed will affect eligibility for Medicaid, the following must be considered:
When you transfer the asset (known as the “lookback period.”) The Deficit Reduction Act of 2005 set forth that assets transferred within 60 months preceding the Medicaid application date are considered for federal eligibility purposes. (The period was 36 months for transfers made before February 8, 2006, as long as they were not made to or from a trust.) Each state must pass its own laws to conform to the federal statute. For example, in California, Medicaid is known as “Medi-Cal” and the current Medi-Cal lookback period is 30 months.
The value involved. The transfer is not considered to be for the full value of the house but the “remainder interest.” This is the right that your children have to receive the home automatically upon your death. The value of the remainder interest is calculated using IRS actuarial tables based on your life expectancy.
The penalty period. In general, if a transfer of assets for less than fair market value is found, Medicaid payment for nursing facility care (and some long term care services) will be withheld for a period of time referred to as the penalty period. The number of months of ineligibility is calculated by dividing the value of the gift by the average monthly cost of nursing home care.
Social services officials cannot require you to liquidate the life estate or to rent the life estate interest property. However, if you do rent out the property, any net rental income you receive will be counted in determining eligibility for Medicaid. Also, if you sell the property, the proceeds or fair market value are counted as a resource for determining Medicaid eligibility.
There are many reasons why a life estate deed may be a better option for you than an outright gift by a regular deed, including these six advantages:
1. The property still qualifies for any property tax exemptions, such as veteran and senior citizen exemptions that were available prior to the transfer.
2. You don’t lose all legal rights to the property.
3. Your children can’t make you move out of the house.
4. Your children’s creditors or bankruptcy trustee can’t take possession of the property.
5. Capital gains taxes when your children sell the home will be calculated on a “stepped-up basis,” which means they will be based on the value at the date of your death rather than your original cost basis.
6. Since the value of the remainder interest is lower than the full value of the house, it will result in a shorter Medicaid penalty period than an outright transfer.
Since Medicaid law is very complex and constantly changing, it is critical to get legal assistance before taking any action.
Keep in mind that an outright transfer of assets to some people does not affect Medicaid eligibility. Those people are: