Medicaid Planning With Reverse Mortgages

05 Oct Medicaid Planning With Reverse Mortgages

Your homestead is usually the largest asset you might own. Most people would prefer to stay at home as long as possible – even if there is a need for skilled care rather than living in a facility. As a result, often elderly (over age 62) with limited resources borrow against the equity in their home to continue their existing lifestyle or to pay for care at home as long as possible. Since many seniors live on a fixed income (i.e., Social Security or a pension, etc.), a reverse mortgage affords the opportunity to borrow against the equity without having to make mortgage payments. As a result, the mortgage balance will rise each month and there will be less equity (if any) that will pass to the homeowner’s heirs or beneficiaries.

Reverse mortgages are used in various circumstances, including: (1) supplementing retirement income to cover living expenses; (2) delaying receipt of Social Security so that Social Security is greater at the time Social Security is received; (3) preservation of investments by not having to take out of a retirement account (which would be income taxed) or selling stock which could result in capital gains taxes; (4) equalization of an estate – i.e., home to one beneficiary and other assets to others; (5) avoidance of foreclosure for failing to pay mortgage; (6) use of proceeds to invest if you think you can get a higher rate of return than the cost of the reverse mortgage or (7) payment for care at home including planning for governmental assistance such as Medicaid.

There are several Medicaid programs that pay for care either at home or if one needs care at a skilled nursing facility. The good news is that your homestead does not count toward long-term care Medicaid eligibility (which is “means-tested) if the equity is under $688,000 in Texas (larger equity limit in states such as California and New York where homes are more expensive) in year 2023 (if you are single) and there is no limit if you are married. The bad news in connection with Medicaid is that if you take out a one-time lump sum, then there could be too much resources since the countable resource limit for a single person is only $2000 (there are several other assets besides the home in Texas that do not count for Medicaid eligibility such as a traditional IRA if there are required minimum distributions (RMDs) being made). If the homeowner did take out a large lump sum against the equity and wanted to apply for long-term care Medicaid to pay for care at home (there are Medicaid programs where the state pays someone for giving care at the Medicaid applicant’s home) or at a nursing home, then paying off all or a part of the mortgage with the loan proceeds is one of several options that could be utilized to get down to the resource limit. However, if there is a possibility of a need for long-term care Medicaid, it is probably best to get a home equity line of credit – just getting money as needed so there is no spend-down (assuming a lack of other countable resources)

The second issue if Medicaid is needed is Medicaid Estate Recovery (see our article entitled “8 Exceptions to losing “Tara” by clicking here). If there is a surviving spouse who lives in the home, then this should not be an issue for Medicaid under Texas law (since it is an exception to a successful claim after death the Medicaid recipient’s death for benefits advanced – other states have a lien against the homestead which means the state can recoup against the home after the death of the surviving spouse) and the lender will not likely call the note since the loan would likely be in both spouses names if in Texas due to the Texas constitution whereby a surviving spouse has a life estate in a homestead. The events of default for a reverse mortgage are: (1) death of the borrower, (2) borrower moves out of the home (more of an issue if not married) or (3) if the borrower fails to pay taxes or insurance on the homestead (lenders do have a program whereby they will do that for you).

However, if there is no surviving spouse, the lender will give notices of possible foreclosure unless the mortgage balance is repaid. Here are a few options to discuss in planning:

1. See if a beneficiary who plans on purchasing the home (if applicable) from the estate of the deceased or from other heirs after the death of the Medicaid recipient has enough funds to pay the balance if the heir or beneficiary is also a beneficiary of an exempt (non-countable resource) IRA of the Medicaid recipient. If so, then that could be used to pay the mortgage balance and/or for the purchase of the home after the death of the Medicaid recipient.
2. If the beneficiary doesn’t have the funds or is not the beneficiary of the Medicaid recipient’s IRA, consider the purchase of life insurance on the potential Medicaid applicant’s life. However, the older one gets, the more expensive the premium. Furthermore, anyone attempting to get life insurance must pass the underwriting requirements. Furthermore, the cash surrender value of the policy would count as a resource (assuming the face value exceeds $1500) if the policy is owned by the Medicaid applicant. Term life insurance does not count as a resource for Medicaid, so perhaps a beneficiary could pay the premium on the life of the insured (the potential Medicaid applicant), collect on the death of the insured Medicaid recipient and then pay the mortgage balance with the life insurance proceeds. If the borrower (potential Medicaid applicant) gave some of the lump sum proceeds to the intended beneficiary to purchase the life insurance policy owned by that beneficiary, then it would be subject to Medicaid’s 5-year look-back period.
3. Borrower (potential Medicaid applicant) should sign a Ladybird deed or Transfer on Death deed. Assuming there is equity in the homestead, then to avoid a successful claim by the state for Medicaid Estate Recovery, the potential Medicaid recipient should sign a deed (either Ladybird or Transfer on Death) subject to the loan – particularly if the potential Medicaid applicant is single. However, even if one of these deeds is executed, the mortgage balance should be paid (and the lien by the lender is superior to the claim of the state). Since lenders are not in the real estate business, they will usually give the heirs or beneficiary up to a year after the death of the borrower to pay the mortgage balance. This gives the beneficiary some time to sell the property (if the beneficiary isn’t purchasing).
4. If the borrower (potential Medicaid recipient) doesn’t want to sign a Ladybird deed immediately, make sure his or her financial durable power of attorney has the ability to (1) do broad gifting; (2) create a Ladybird deed; and (3) permit self-dealing assuming the borrower can trust the agent. It is often common to also give the legal description of the property in the power of attorney. If the intended beneficiary has a problem (i.e., disability, creditors, addiction, etc.), the power of attorney (of the potential Medicaid applicant) should also give the ability to create a trust. A living trust could also be useful if there are beneficiaries who cannot agree with selling the home or on the price to sell.
5. If the borrower (potential Medicaid recipient) wants to have the option to sell the home without spend-down of the proceeds, consider an asset protection trust with the borrower retaining elements of control. This is subject to a 5-year look-back period, so this is probably more useful for a younger or healthier reverse mortgage borrower. So, if the borrower may have to go into a group home or an assisted living or memory care center which usually does not have Medicaid coverage, this type of trust is a consideration so there would not have to be a spend-down of home proceeds.

When considering a reverse mortgage, both estate and Medicaid planning options should be considered. This article should not be considered an endorsement of reverse mortgages – it is just a tool in the toolbox that some consider. If so, planning for worst case scenario options should be discussed.

If interested in learning more about this article or other estate planning, Medicaid and public benefits planning, probate, etc., attend one of our free upcoming Estate Planning Essentials workshops by clicking here or calling 214-720-0102. We make it simple to attend and it is without obligation.