Many years ago, I had my first encounter with the 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 that either one needed to enter a nursing home. At the time, the husband had serious health issues. I made a number of recommendations, including that their home be transferred from the husband to the wife. Such a transfer is known as a "spousal transfer” – an exempt transfer that does not create a period of ineligibility for Medicaid.
Unfortunately, the clients decided not to implement my suggestions. Years later, I received a call from the couple's daughter. Her dad had been placed in a nursing home and her mother just passed away. Because the title to their home was jointly held, it passed by law to the husband upon his wife's death. Medicaid did legally recover from the proceeds of the home’s sale the substantial amount it paid for the father’s nursing home care.
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 their most valuable asset. Taking steps to protect your home now will be well worth your effort in the future.
A primary residence can be transferred to five categories of people without affecting Medicaid eligibility: a spouse, a minor, a disabled or blind child, an adult child who has lived in the home as the parent’s caregiver for at least two years immediately prior to the institutionalization, or a sibling with an equity interest in the home who has resided there for at least one year prior to the institutionalization. If you are able to utilize any of these transfers, no ineligibility for Medicaid will result.
Once a decision has been made to transfer the primary residence, a variety of estate tax, gift tax, and capital gains tax considerations need to be made. The Deficit Reduction Act of 2005 ("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 coverage is made before the five-year look back period expires.
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. The title to the premises is deeded to the trust’s trustees and its creator is granted a life estate in the premises (the right to reside). In many cases, the creator is also given the right to receive all of the trust's income if liquid assets are ever transferred into it. While the trust’s principal is not accessible to its creator, the trust can benefit his or her children or other third parties. The transfer to the Irrevocable Income Only Trust will create a five-year look back period as a result of the provisions of the DRA for nursing home Medicaid eligibility. 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 purposes.
Regardless of the specific planning option you choose, what is most critical is that some steps be taken to protect your primary residence. As I often tell clients, until the premises and assets have been transferred, nothing has been done to protect them from the costs of a nursing home.