02 Jun 6 WAYS TO PROTECT THE EQUITY VALUE OF A HOMESTEAD FOR LONG-TERM CARE MEDICAID ELIGIBILITY AND MEDICAID ESTATE RECOVERY
Although there is unlimited equity limit of a homestead to be excluded as a countable resource if the applicant for long term-care Medicaid is married and the non-applicant spouse lives in the community (the community spouse), there is a $730,000 equity limit in 2025 if the applicant is single. Thus, if a homestead was valued at $800,000, then $70,000 would be considered a countable resource. Furthermore, there could be a loss of eligibility of the institutionalized spouse if the community spouse dies first and the home equity exceeds the limit and the institutionalized spouse is the beneficiary of the community spouse’s interest or if both spouses need long-term care Medicaid. Additionally, the value of the home could rise from the date of eligibility to the date of recertification. The government often looks at property tax statements to determine the fair market value.
Since home prices continue to rapidly rise in Texas, this is likely to be more of a problem than it has been in the past. The fair market value of a homestead of the great majority of Medicaid applicants is below the limit.
Strategies to reduce the homestead value:
#1. Asset Protection Trust – For those who either are single or married and have a high valued homestead (which includes farms or ranches where all acreage contiguous to the homestead is considered the homestead) and who can plan 5 years in advance, an asset protection trust can be utilized. This can be accomplished without losing the homestead or other exemptions with favorable capital gains treatment being retained including a step-up in basis. Also, if in the trust, the cash would not have to be “spent-down” if the homestead is sold.
#2. Ladybird Deed if Owned by a Married Couple – There are different ways a Ladybird deed can be drafted. A Ladybird deed is an enhanced life estate deed whereby the grantor retains certain rights (i.e., the right to sell or mortgage the property). As a result, it is not a penalized transfer under Medicaid’s 5-year look-back rules. Under a 2023 appellate court case, the share of a co-grantor of a Ladybird deed passes to the grantee upon the co-grantor’s death and is not subject to revocation by a surviving co-grantor unless the deed expressly provides otherwise. Thus, if the equity in the married couple’s jointly owned home exceeds the limit, the community spouse can execute a Ladybird deed where his or her interest goes to someone other than the institutionalized spouse (reducing the Medicaid recipient’s interest to ½ of the fair market value at the community spouse’s death).
#3. Placing the Homestead for Sale – Any real estate placed for sale (at fair market value) is a non-countable resource until it is sold (and then cash counts).
#4. Selling the Home and Purchase Non-Countable Resources – If the home is sold, then the proceeds could be used to purchase other non-countable resources (i.e., a less expensive home, pre-need funeral, car, etc.).
#5. Selling the Home and Making Transfers That Are Not Penalized – There are some exceptions to long-term care Medicaid’s 5-year look-back period. As a result, the potential Medicaid applicant can sell his or her home or a partial interest in his or her home and then make a transfer to an irrevocable 529 or to UTMA accounts. Another option is a gift an interest in the home to a child with a disability or who is blind (although if the disabled child is receiving Medicaid, then such child could also be subject to the Substantial Home Equity Value rules). If the home equity is over the limit, a transfer of the home to a sole benefits trust (not a special needs trust) is not subject to the limit. This generally works better if the child is on Social Security Disability instead of Supplemental Security Income since if the home is sold, payments must be made to the disabled child which could jeopardize Supplemental Security Income (which has income limits) and Medicaid for the disabled child (unlike Social Security Disability where the recipient gets Medicare and there is no income limit other than wages).
#6. Private Reverse Mortgage – If a child has been making contributions for a parent’s care, even though the parent has a high valued home, a note and deed of trust could be prepared similar to a reverse mortgage. You can leave out the default provision if the parent moves out of the homestead (required in reverse mortgage with a commercial lender). This is best used when planning in advance of care need. The debt owed to the child would reduce the equity limit. This also helps in families where one child is providing most of the support.
There are other ways (i.e., reverse mortgages, home equity conversion loans) to reduce substantial home equity, so the strategy to be considered depends on facts and what is best for the client.
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