Estate Planning Isn’t Just For The Elderly

Happy, smiling couple in their sixties.

Protecting the Primary Residence From The Cost Of a Nursing Home In A Post-DRA World

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 residence from the cost of a nursing home. An elderly couple 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 to the clients, 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. Social Services Law §366(5)(d)(3)(ii).

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 house was jointly held with his wife, upon her demise title to the house had now passed by operation of law to the husband. Thus, the primary residence was now an asset against which Medicaid could place a lien and assert a claim against. Social Services Law §369(2)(a)(ii), 42 U.S.C.A. §1396p(a)(1). Thus, Medicaid could 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. Although, we were still able to protect a significant portion of the sale proceeds, significantly more could have been protected if the recommended advance planning had been implemented.

With the average cost of a home in Westchester County being in excess of $600,000, it is not unusual for the primary residence to be the most valuable asset one owns. Thus, taking prudent steps to protect the residence 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. 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. Social Services Law §360-4.3(d), 18 NYCRR §360-1.4(f). 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 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:

  • Spouse;
  • Minor Child
  • 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 parent’s 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 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 Medicaid Qualifying Trust, also 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. These are issues that need to be fully explored and reviewed with the client.

A non-exempt 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. The reservation by the transferor of the life estate will also allow the transferee, upon the death of the transferor, to receive a full step up in the cost basis of the property to its fair market value on the date of the transferor’s death, if there is still an estate tax in existence at said time. 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 life tenant would have to be compensated for the actuarial value of the life estate he or she relinquished at the time of sale, which would have an impact on his or her Medicaid eligibility.

The most commonly utilized, and perhaps best Medicaid planning option relevant to the primary residence is the transfer of the residence to a Medicaid Qualifying Trust, also known as an Irrevocable Income Only Trust. Title to the premises is deeded to the trustees of the trust and the transferors are generally granted a life estate in the premises, and in many cases are given the right to receive all of the trust’s income if liquid assets as ever transferred to the Trust. However, no invasion of the trust principal can be made to or for the benefit of the transferors/grantors of the Trust. However, the Trustees, if the Grantors of the trust wish 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. Thus, it would be most 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.

The transfer to the irrevocable trust has many estate and gift tax advantages which make it preferable to an outright transfer either with or without a life estate being reserved by transferor. 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.

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 are transferred nothing has been done to protect the asset from the costs of a nursing home.

Enea, Scanlan & Sirignano, LLP