Transfer Of Home Exceptions Without Medicaid Transfer Penalty

Transfer Of Home Exceptions Without Medicaid Transfer Penalty

Home, sweet home – the most valuable asset of many. However, if you need financial assistance for long-term care, you have to be careful when making a transfer.

Long-term care Medicaid (which helps pay for skilled nursing care that many seek since Medicare has limited coverage and most do not have long-term care insurance) has a transfer of assets policy that penalizes an applicant for transferring assets for less than fair market value if the transfer occurred within 5 years an application for benefits was submitted.

Although a homestead is generally a non-countable resource (equity limit is $688,000 in year 2023 if the applicant is single and no limit if married) for long-term care Medicaid if there is an intent to return home, there is an anti-fraud provision resulting in a transfer penalty creating Medicaid ineligibility (the government will not pay for care during the penalty period) if the homestead is transferred unless it fits within an exception. One might ask “why there should be a transfer penalty for a transfer for less than fair market value if the home doesn’t count as a resource?” Long-term care Medicaid (unlike certain veteran benefit programs) has a right to make a claim against the home of the Medicaid recipient after death to the extent Medicaid benefits (care and drug costs) were advanced. Therefore, it would eliminate the state’s right to make a claim for reimbursement if transfer of the home was permitted. However, there are 5 exceptions to the rule as follows:

  1. Transfer to spouse who lives in the home

Although this is an exception, there are a couple of problems that should be considered: (a) Under the Texas constitution, a surviving spouse has a life estate in the homestead. As a result, title companies generally consider the deed ineffective since a spouse is always entitled to that constitutional protection although there are some title companies that will accept it if it is done for Medicaid reasons. (b) Even if there was no title company insurance issue, if the homestead has highly appreciated and the spouse on Medicaid transferred the home to the community spouse (the spouse who lives in the house) as his or her sole and separate property, there would be a loss of the step-up in basis when the spouse (on Medicaid) dies since the home would be the separate property of the community spouse. This could result in capital gains tax when the community spouse sells the homestead. If the home remained community property, there would be a step-up in basis (recalculation of the value of the home as of the date of death instead of date of purchase) on the death of the first spouse to die which would reduce, if not eliminate, potential capital gains if the surviving spouse sold the property prior to his or her death.

  1. Transfer to a minor child under age 21 or child who is disabled

Since most who apply for long-term care Medicaid are elderly, this exception for a child is more frequently used when the Medicaid applicant has a disabled child since the disabled child has no age limit. However, there are some issues if the disabled child is on Medicaid (i.e., Supplemental Security Income recipient) potentially losing benefits as a result of the inheritance. As a result, this exception is more commonly used if the disabled adult child is receiving Social Security Disability Income (which is not “means-tested”). Caveat: Potential loss of step-up in basis as the donee takes the basis of the donor. On the other hand, Medicaid estate recovery (the right of the state of reimbursement for expenses it advanced) is avoided. However, a disabled child is also an exception to a successful claim for Medicaid estate recovery.

  1. Transfer to a sibling who has an equity interest in the home and has lived there at least one year

Sometimes children inherit from a parent and they live together in a homestead. The Medicaid applicant can transfer their equity interest to their sibling without penalty.

  1. Transfer to son or daughter who lives in the home for at least 2 years before the applicant’s institutionalization and provided care that prevents institutionalization

The state will request written statements from the applicant’s doctor documenting that the Medicaid applicant was able to remain in their home for at least 2 years because of the care provided by the son or daughter. The son or daughter would also have to provide proof that he or she lived in the home.

  1. Ladybird Deed or Transfer on Death Deed

A Ladybird deed is an enhanced life estate deed whereby the Medicaid applicant retains the right to live in the home for life and has the ability to sell or mortgage the homestead without the consent of the remainder beneficiaries (i.e., children or trustee of a trust) in addition to being able to change who is the grantee (beneficiary). This is a transfer subject to divestment.

A Transfer on Death deed also transfers property on the death of the owner. The owner could cancel the deed at anytime prior to death (assuming mental capacity). An agent under a power of attorney cannot sign a Transfer on Death deed unlike a Ladybird deed (assuming there was broad gift-giving authority).

In both cases (Ladybird deed and Transfer on Death deed), there is no transfer penalty since the Medicaid applicant can change his or her mind on who is the grantee (beneficiary) without the consent of the grantee and retains control.

For more information on Ladybird deeds vs Transfer on Death deeds click here. There is no loss of step-up in basis with either a Ladybird deed or Transfer on Death deed, which is an important consideration if the homestead has appreciated in value.

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.

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