Anthony J. Enea, Esq.
As the years pass, it has become clear that for many Westchester County residents their home is often the largest single asset they will own. With the average cost of a home in Westchester County being in excess of $700,000, taking prudent steps to protect one's residence is well worth the effort.
For Medicaid purposes the primary residence is known as the "homestead" and is an exempt asset (does not effect eligibility for Medicaid), so long as it is occupied by the applicant, the applicant's spouse or the applicant's minor, disabled or blind child. Social Services Law §366(2)(a), 18 NYCRR §§ 360-1.4(f) The homestead can be a one, two or three family home, condo or co-op and still be exempt for Medicaid eligibility purposes, however, any net income is not exempt. 18 NYCRR
However, the homestead is an asset against which Medicaid can have a lien.
In compliance with federal statute, New York has an estates recovery program in place. 42 U.S.C.A. §1396 p(b)(1), Social Services Law §104, 369.
The homestead can be transferred to five (5) categories of people without affecting Medicaid eligibility:
Disabled or blind child of any age;
Adult child who has lived in the home of the parent for at least two years immediately prior to the parents institutionalization, and who has been a care giver to the parent;
- A sibling of the Medicaid applicant who has resided in the home for at least one year prior to the institutionalization, and who has an equity interest in the home.
Thus, if you are able to utilize any of the aforestated transfers, no ineligibility for nursing home Medicaid would result.
Once a decision has been made to transfer the primary residence, whether it be as an exempt transfer or a non-exempt transfer (one that will create a period of ineligibility for Medicaid) a variety of estate tax, gift tax as well as capital gains tax considerations need to be made. Does the client want to make an outright transfer with or without the reservation of a life estate, or does the client wish to transfer the homestead to an irrevocable income only trust, a/k/a "Medicaid Qualifying Trust."
Because Medicaid is a "means tested" program, if assets are "transferred" e.g., given away without receipt of something of equivalent value in return ("uncompensated transfer"), this will trigger a period of ineligibility for nursing home Medicaid.
Under present New York law "assets" that are transferred by gift within 36 months ("look back period") of the date of the application for nursing home Medicaid is made will cause the transferor to be ineligible for nursing home Medicaid for a period of time ("penalty period"). The penalty period commences on the first of the month following the month of the gift, and is a number of months determined by taking the value of the gift and dividing it by the average cost of a nursing home per month in the county where the Medicaid applicant resides as determined by the Dept. of Social Services (Average monthly rate for nursing home care for Westchester County is $8,332.00 as established by Department of Social Services for 2005).
In New York City, the figure is $8,870.00 and in Long Island $9,612.00. Thus, if a residence valued at $300,000 is transferred within 36 months of the application for Medicaid, the transferor residing in Westchester County would be ineligible for Medicaid for approximately 36 months commencing on the first of the month following the month of the transfer. If a 36 month period of ineligibility has been created by the transfer, it is imperative that filing for Medicaid be withheld until the 36 months period has elapsed. There is no maximum limit on the period of ineligibility if the application for Medicaid is made within 36 months of the transfer of assets.
Transfers of assets by the spouse of a Medicaid applicant made within 36 months of the Medicaid application will also disqualify the applicant for the appropriate penalty period.
Furthermore, the spouse of a Medicaid applicant who funds an irrevocable income only trust will be making a transfer which results in a period of ineligibility for the applicant.If a spouse makes a non‑exempt transfer after the applicant has been approved for Medicaid and has been in the nursing home for thirty (30) days, the transfer would not trigger a period of ineligibility for the spouse that has been approved. However, the spouse making the transfer has created a period of ineligibility for him or herself.
Outright Transfer Without Reservation of a Life Estate
A non-exempt transfer of the premises without the reservation of a life estate to the transferor is perhaps the least desirable option, as the transferees will receive the "carryover basis" (price paid or value on date of receipt plus capital improvements) of the transferor for capital gains tax purposes. For Medicaid eligibility purposes, the fair market value of the premises on the date of transfer will be utilized to determine the period of ineligibility for Medicaid nursing home created. For example, if the fair market value of the premises is $500,000 and the premises are transferred on December 5, 2005, a period of ineligibility for Medicaid nursing home of sixty (60) months is created, commencing on the first of the month following the date of the transfer. The period of ineligibility is determined by taking the dollar value of the asset transferred and dividing it by the average monthly cost of the nursing home as determined by Medicaid in the County of the applicant's residence. For example, $500,000 ) $8,332 ' 60 months.
Outright Transfer With Reservation of Life Estate
A non-exempt outright transfer of the homestead with the retention by the transferor of a life estate in the transferred property, often gives the transferor the comfort of knowing that he or she will have the legal right to remain in the premises for the remainder of his or her life. Additionally, the penalty period for Medicaid created by the transfer is less than a transfer to an irrevocable income only trust. The period of ineligibility created for an outright transfer with the reservation of a life estate is determined by taking the dollar value of the remainder interest and dividing it by the average cost of the nursing home for the County of the applicant's residence. See Dept. of Health and Human Services Health Care Finance Administration State Medicaid Manual Transmittal No. 64.
The maximum period of said outright non-exempt transfer with the reservation of a life estate is thirty-six (36) months, so long as no application for Medicaid is made until all periods of ineligibility have expired.
The reservation by the transferor of a life estate, will also allow the property transferred to be included in the transferor's estate for estate tax purposes and the transferee to receive a full step up in the cost basis of the property to its fair market value on the date of the life tenant's death. See §2036(a) of the Internal Revenue Code.
However, the client should be advised that if the premises are sold prior to the life tenant's demise, that there will be capital gains tax consequences to the transferee resulting from the loss of the step-up in cost basis. Additionally, the transferor would have to be compensated for the value of the life estate relinquished, which could have a significant impact on Medicaid eligibility.
Transfer to an Irrevocable Income Only Trust
Another commonly utilized Medicaid planning option utilized to protect the primary residence, and in my opinion in most cases a more prudent option, is the transfer of the residence to an irrevocable income only trust, a/k/a "Medicaid Qualifying Trust." Title to the premises is deeded to the trustees of the trust and the transferors are granted the right to reside in the premises for their lives. A non-exempt transfer of the homestead to an irrevocable trust will create a period of ineligibility for Medicaid equal to the value of the residence divided by the monthly average cost of nursing home care in the County where the applicant resides. However, the maximum period of ineligibility for Medicaid is sixty (60) months, unless, an application for Medicaid is made before all periods of ineligibility have expired.
The transfer to the irrevocable trust has a number of estate and gift tax advantages which make it preferable to an outright transfer without a life estate of the residence. For example, the transfer to the trust can be structured so as to avoid any gift taxes and to allow the beneficiaries of the trust to receive a step up in cost basis upon the demise of the transferor as well as allowing the continued availability of the principal residence exclusion for capital gains tax purposes if the homestead is sold prior to the death of the transferor. It also does not require that the value of the life estate be paid to transferor upon a sale.
Irrespective of which specific measures are taken to protect the primary residence, the critical element is that some steps be taken to do so. As I often tell clients, until the premises are transferred nothing has been done to protect the asset from a potential Medicaid claim.