Protecting Your Home From The Costs Of A Nursing Home

By: Anthony J. Enea, Esq. *

Many years ago I had my first encounter with the disastrous consequences that result when clients fail to take the necessary steps to protect their home from the cost of a nursing home. A husband and wife had consulted with me regarding a plan for protecting their assets in the event either one of them needed to enter a nursing home. At the time of the consultation the husband had serious health issues, however, his wife was in relatively good health. I made a number of different recommendations, including, the recommendation that their home be transferred from the husband to the wife. Such a transfer is known in Medicaid parlance as a "spousal transfer", thus, it is an exempt transfer, which does not create a period of ineligibility for Medicaid.

Unfortunately, the clients decided not to implement my suggestions. As is often the case, several years later I received a telephone call from the couple's daughter advising me that Dad had been placed in a nursing home because he suffered from senile dementia, and that Mom had just passed away. Because title to their home was jointly held, upon the wife's demise title to the house passed by operation of law to the husband. Thus, the primary residence was now an asset owned by an individual suffering with senile dementia and an asset against which Medicaid could place a lien and assert a claim. Thus, Medicaid could legally recover from the proceeds of the sale of the home the Medicaid benefits properly paid for the nursing home care of the father.

As a result of the failure to implement a plan to protect the home, Medicaid was paid a significant amount upon the sale of the home.

With the average cost of a home in Westchester County being in excess of $600,000, it is not unusual for one's home to be the most valuable asset one owns. Thus, taking prudent steps to protect the home are 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. 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. However, as is stated above, the homestead is an asset against which Medicaid can have a lien or assert a claim against.
In compliance with federal law, New York has an estates recovery program in place.

The homestead can be transferred to five (5) categories of people without affecting Medicaid eligibility:
1. Spouse;
2. Minor Child;
3. Disabled or blind child of any age;
4. Adult child who has lived in the home of the parent for at least two years immediately prior to the parent's institutionalization and who has been a care giver to the parent; and
5. 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 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. For example, does the client want to reserve a life estate, or transfer the property outright without the reservation of a life estate, or to a trust known as an Irrevocable Income Only Trust. Additionally, the provisions of the Deficit Reduction Act of 2005 ("DRA") which became effective on February 8, 2006 must be carefully reviewed. The DRA created a five year look back period for all non-exempt transfers, as well as an onerous period of ineligibility for Medicaid if an application for nursing home Medicaid is made before the five (5) year look back period has expired. The aforestated transfer of asset rules do not apply to Medicaid home care.

The most commonly utilized and, in my opinion, best Medicaid planning option relevant to the home is the transfer of the home to a trust known as an Irrevocable Income Only Trust. Title to the premises is deeded to the trustees of the trust and the creator/grantor of the trust is granted a life estate in the premises (the right to reside), and in many cases the creator/grantor is also given the right to receive all of the trust's income if liquid assets are ever transferred to the Trust. However, no invasion of the trust principal can be made to or for the benefit of the creator/grantor of the trust. However, the trustees, if the creator/grantor of the trust wishes to provide them with the authority, could invade the principal of the trust for the benefit of the Grantor's children or other third parties, not including themselves.

The transfer to the Irrevocable Income Only Trust will create a five (5) year look back period as a result of the provisions of the DRA for nursing home Medicaid eligibility. Thus, it is very important not to apply for nursing home Medicaid until said look back period has expired to avoid the potentially lengthy ineligibility period imposed by Medicaid as a result of the DRA. However, once the five years have passed, the house and any other assets held in the name of the Trust are no longer considered available resources for Medicaid eligibility purposes. Thus, Medicaid can no longer assert a claim against said Trust assets.

In conclusion, irrespective of which specific planning option is chosen 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 and assets have been transferred, nothing has been done to protect the assets from the costs of a nursing home.