Rumor: “Married couples should transfer their residence to their children to ‘protect it’ from nursing homes or Medicaid or to qualify for such care.”
Reality: Such a transfer will create a Medicaid disqualification period if either spouse needs to apply for Medicaid benefits within five years of the date of transfer of the house.
Married couples should be cautious about transferring their home’s title to their children to qualify for Medicaid or to shield the residence from attempts to recoup the cost of Medicaid or nursing care. There are several reasons why such a transfer can be a mistake, including Medicaid ineligibility, adverse tax consequences or loss of control over the property.
Medicaid Eligibility and Home Ownership
People who qualify for their state and the federal Medicaid program, which covers the cost of long-term care, must consider their state Medicaid regulations that dictate the qualifying requirements. In New Jersey, an individual who qualifies for Medicaid must have no more than $2,000 in assets, be deemed “medically eligible” and meet the annual income requirements. Many people look to transferring home ownership to their children as part of an asset “spend down” strategy to qualify for Medicaid.
However, this strategy can backfire if not done properly. The Medicaid program in New Jersey has a five-year “look-back period” to keep people from trying to hide or transfer their assets for the sole purpose of qualifying for the program. Since Medicaid is meant to help those in need, Medicaid imposes a penalty on those who transfer assets (within the five-year look-back period), like a home, without receiving fair value in return. If Medicaid determines that such a transfer took place, it will impose a penalty period during which the applicant is ineligible for benefits.
The danger lurking in this strategy is that an applicant may transfer their home and gift their wealth, only to be deemed ineligible for Medicaid and left without funds to pay for long-term care.
Medicaid allows for some exceptions to the rule that won’t trigger a penalty. We encourage clients to explore those options. They include transfers to:
- A spouse
- A child who is under age 21 or who is blind or disabled
- A trust for the sole benefit of a disabled person under age 65 (even a trust for the benefit of the Medicaid applicant, under certain circumstances)
- A sibling who has lived in the home during the past year and already has an equity interest in the home
- A child who lived in the home for at least the past two years and provided care that allowed the applicant to avoid a nursing home stay (this requires a detailed assessment and supporting documentation)
Home ownership does not preclude Medicaid eligibility. However, you want to avoid having the state file a “Medicaid lien” against the house to recoup the costs of the care.
Home Transfers and Tax Issues
Transferring a home’s title to a child or someone else could also cause adverse tax consequences for the new homeowner. It is important to consult with an accountant or other tax specialist for an opinion as to how this may affect you.
Loss of Control of the Home
Of course, when a home’s ownership is transferred, the new owner has the authority to do with it as they please. The other consideration is that the house could be at risk should the new owner be sued or get divorced.
This is the sixth in our Rumor v. Reality estate planning series. Watch for additional, helpful estate planning information in the coming weeks! Also in this series:
- I Don’t Need an Attorney to Edit My Will
- Shelf Life of Estate Plans
- When Equal Inheritances Become Unequal
- Using a Revocable Living Trust to Avoid Probate
- Accessing a Partner’s Accounts
Medicaid planning can be complex and confusing. Whether you’re planning for yourself or a loved one, the experienced attorneys at Timothy Rice Elder & Estate Law can help answer questions and create a plan that works for you. Contact us today.
