MEDICAID AND THE HOME – PART 1

by Thomas D. Begley, Jr., CELA

 

 

 

 

 

This is the first part of a two-part series on Medicaid and the home.  The most valuable asset that most Medicaid planning clients have is their home.  They also have very strong emotional attachments to the home.  There are a number of strategies available for dealing with the home when doing Medicaid Planning.  There are five issues that must considered in planning for the home. These are:

• Is the home countable?
• Taxation – income and real estate
• Estate recovery
• Risk factors
• Transfer of asset penalty

Non-Countable Asset

The primary residence is a non-countable asset. In New Jersey, the maximum equity that is non-countable is $840,000.  This is not a major consideration.  As long as the home is occupied by the Community Spouse, it is exempt. The maximum equity really only applies to a single individual receiving care at home.  If the individual is in a facility and has the intent to return home, the home is non-countable but a six-month absence from the home creates a presumption that the individual does not intend to return home and the property becomes countable.

 

Forms of Ownership

There are five forms of ownership commonly used for real property.

Tenants by the Entirety

This is a form of joint ownership, but is limited to the situation where a husband and wife own property together.  Upon the death of one spouse, the property automatically transfers to the surviving spouse.

Joint Tenants

This is a form of joint ownership typically used by individuals who are not married.  Joint ownership typically include the right of survivorship, so that on the death of one joint owner the property automatically transfers to the surviving joint owner.

Tenants in Common

Under a tenants in common arrangement, each individual owns a separate share.  Percentage ownership can be whatever is agreed upon.  The percentage should be specified in the deed.  If there is no percentage specified, each owner is presumed to own a pro rata share.

Life Estate

A life estate gives the owner of the life estate a right to live in the property and the obligation to pay expenses related to the property including real estate taxes, insurance, utilities, etc. If the property is sold, the life tenant is entitled to a portion of the proceeds of sale.  This is a disadvantage when doing Medicaid planning.  The value of a life estate for a 75-year old individual, as set forth in HCFA Transmittal 64, is slightly in excess of 52%. Therefore, if a home is sold producing net proceeds of $400,000, the life tenant would be entitled to approximately $208,000, which Medicaid would consider a countable asset.

Right to Use and Occupy

A right to use and occupy gives the owner the right to use and occupy the property, the same as a life estate does, and imposes the same obligations to pay real estate taxes, insurance, utilities, etc., but the holder of the right to use and occupy does not receive any rental income or any portion of the proceeds of sale if the property is sold. This is generally the better option in Medicaid planning.

 

Taxation

Qualifying property owners have a principal residence exclusion.  For single individuals the exclusion is $250,000.  For married individuals the exclusion is $500,000.  If parents are considering transferring the home to their children, they must understand that the parents’ basis will carry over to the children and the principal residence exclusion will be lost, so that in the future the children may be responsible for significant capital gains taxes.  If the individual owns property at death and leaves it to children, the children are entitled to a step-up in basis.  For example, if the parents paid $200,000 for the home and transferred it to the children during the parents’ lifetimes, and the property is currently worth $400,000, and the children ultimately sell the property for $400,000, the children will be responsible for capital gains tax on the $200,000 gain.  Assuming a 25% combined federal and state income tax bracket, the tax would be roughly $50,000.   If the parents left the same property to the children on death with a $200,000 cost basis, and it was worth $400,000 on the death of the parent, the children’s basis would step up to $400,000.  If the children then sold the property for $400,000, there would be no capital gain and no capital gains tax.  The saving over the prior example would be $50,000.

In order to qualify for the capital gains tax exclusion, the parents must be the owner and occupant for two of the five years preceding the date of the sale.  Under most circumstances, time in a facility counts as occupancy.  This principal residence exclusion can be used every two years.  If the client cannot occupy the property for two of the five years preceding the date of the sale because of a change of employment or health, a reduced exclusion is available.

Real estate tax benefits are important and should be considered by the Elder Law attorney.  Qualified individuals owning property in New Jersey are entitled to a homestead tax rebate, a senior citizen’s deduction, a Veteran’s deduction, a Veteran’s exemption, and a tax freeze.  There are financial requirements for qualification, but the individual also must own and occupy the property to qualify.  If property is transferred outright to children, these exemptions may be lost.  If a parent transfers property to children or to a trust but retains a life estate or a right to use and occupy, these real estate tax benefits are retained.

 

Estate Recovery

New Jersey has a right to recover for medical assistance paid under certain circumstances.  This right includes the right to recover against a home.  The right to estate recovery applies to a home owned as tenants by the entirety, joint tenants or tenants in common. Where the home is owned as tenants by the entirety or joint tenants, the right to estate recovery applies to 100% of the value of the home.  Where the home is owned by tenants in common, the right to estate recovery applies only to that percentage of the home owned by the Medicaid recipient.

There is no right of estate recovery against a life estate or a right to use and occupy the property.  Estate recovery is an important consideration in determining how real estate should be titled.

In planning for a married couple, the Elder Law attorney should always consider deeding the property to the Community Spouse. Otherwise, there is Medicaid recovery against the property on the death of the Institutionalized Spouse.  For purposes of our discussion, the Institutionalized Spouse is the spouse receiving Medicaid.  He or she may or may not be in an institution.  They are considered institutionalized if they are receiving an institutional level of care, even at home.  By deeding the property to the Community Spouse during the Institutionalized Spouse’s lifetime, the home is removed from the estate of the Institutionalized Spouse and estate recovery is no longer available.

 

Risk Factors

If parents transfer their home to their children, there are certain risk factors that must be considered.  These include the right of the children’s creditors to recover against the property, which is now in the name of the children.  If the children become involved in a divorce, the parents’ home could be tangled up in that mess.  If the children are receiving public benefits, the transfer of the home to such an individual may affect those public benefits.  For example, if a home is transferred to a child receiving SSI and Medicaid and the child does not live in the home, the home would be considered a countable asset that would cause a loss of SSI and Medicaid.

 

Exempt Transfers

Certain transfers are exempt from a Medicaid transfer of asset penalty.  These include the following transfers to:

• Community Spouse
• Child under 21 or a child of any age who is blind or disabled
• Caregiver child who has provided a level of care sufficient to keep the parent out of the facility for two years. New Jersey closely scrutinizes transfers to a caregiver child and careful medical documentation must be provided.
• Sibling who has an ownership interest in the home and who has lived in the home for a period of at least one year is an exempt transfer.

[Continue to Part 2]