Protecting Your Home from the Costs of a Nursing Home

Steps to Take Now

There are ways to legally protect yourself and your assets from the government's Medicaid program well before you need care. @Tetra Images, Getty Images

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. It’s an unfortunate scenario that I’ve seen many times since.

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 of the consultation, the husband had serious health issues.

His wife, however, was in relatively good health. I made a number of recommendations, including that their home be transferred from the husband to the wife. Such a transfer is known in Medicaid parlance 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. Several years later I received a call from the couple's daughter advising me that 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. Thus, Medicaid could – and did – legally recover the substantial amount it paid for the father’s nursing home care from the proceeds of the home’s sale.

A person’s home is oftentimes among his or her most valuable assets. Taking prudent 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. This includes 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. Additionally, the provisions of the Deficit Reduction Act of 2005 ("DRA") 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 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, however, the house and any other assets held in the name of the trust are no longer considered available resources for Medicaid purposes.

In the end, 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.

Editors Note: The information in this article should be considered for informational purposes only. Consult a qualified professional in your area as regulations may vary by state. For example, in some states like North Carolina there is a three year look back for assisted living and a five year look back for nursing homes. No matter what, legally protect yourself.

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