by: Begley Law Group

by Thomas D. Begley, Jr., CELA

[Article originally published in Straight Word]  This is the second part of a two-part series on Medicaid and the home.  The previous article discussed the circumstances under which the home would be a non-countable asset, the five forms of ownership, income and real state taxation, estate recovery, risk factors, and exempt transfers.  This article will discuss the differences between a life estate and a right to use and occupy and various strategic options for dealing with the home.

Life Estate v. Right to Use and Occupy

The main advantage of transferring a home and retaining a life estate is that the value of the transfer is reduced and the penalty for the transfer is also reduced.  Let’s take a home with an equity of $400,000 and a parent, age 75, who transfers a home to a child.  The life estate is worth 52%, so the child is only receiving a little less than 48% of the value of the home.  At 48% the value of the asset transferred would be $192,000.  The Medicaid transfer of asset penalty would then be based on $192,000.  At the time of this writing the 2018 divisor has not yet been published.  With a divisor of $423.95 per day or $12,895.15 per month, the penalty would be 14 months and 27 days.  Conversely, if the entire home were transferred valued at $400,000, the penalty would be 31 months and 1 day.  The disadvantage of a life estate is if the property in our example is sold, the parent would receive 52% of the proceeds of sale.

Under a right to use and occupy, the parent would not be entitled to any portion of the proceeds of sale.  The disadvantage is that the penalty for transfer of assets would be based on the entire $400,000 value of the home.

Under either the retention of the life estate or retention of a right to use and occupy, the real estate tax benefits and step-up in basis can be retained.

Strategic Options

The strategic optionsfor dealing with the home are as follows:

Transfer Outright to Children

The problem with the outright transfer of the home to children is that the risk factors of creditors and divorce must be considered.  In addition, the principal residence exclusion from capital gains tax is lost. There would be no step-up in basis on death.  An advantage in transferring to children is that if there is a mortgage on the property, the lender would not be able to exercise the due on sale clause, because the Garn-St. Germaine Act provides an exemption in the case of a transfer to a spouse or children.

If there is a transfer to the children with a retention of a life estate or a right to use and occupy, the step-up in basis on death can be retained.

Sell Remainder Interest

Under this strategy, the parent would sell a reminder interest in the home to the children and retain a life estate for himself/herself.  The children would pay for the remainder interest.  Using our previous example of a home with $400,000 of equity and a parent age 75, the children would pay approximately 48% of the Medicaid value of the home or $192,000 for the remainder interest, but receive a property worth $400,000 on the parent’s death.  The disadvantage would be that if the property is sold during the parent’s lifetime, the parent would receive a portion of the proceeds of sale.

Buy Life Estate

Under this strategy, a parent would buy a life estate in the home of a child.  Suppose a child had a home valued at $400,000 and owned it free and clear of a mortgage. Again, suppose the parent is 75 years of age.  Suppose the husband is moving into a nursing home, and the wife will be moving in with the children.  The wife could pay 52% of the $400,000, or $208,000, to the child for a right to use and occupy.

In New Jersey, Medicaid has taken the position that the parent’s right to use and occupy must be exclusive.  Therefore, if the child and the child’s family remain in the property, they would have to pay rent to the parent with the life estate.

Family Reverse Mortgage

There are situations in which children make loans to their parents.  The children could take a reverse mortgage and record it against the parent’s home. On the sale of the property, the children will be repaid the amount due.

Transfer to Grantor Trust, Retain Right to Use and Occupy

This is one of the best strategies in planning for the home.  The parent retains the right to use the home and pays all of the expenses.  Nothing really changes during the parent’s lifetime. If the parent remains in the home, upon death the children receive a step-up in basis.  If the property is sold, the proceeds of sale go into the Grantor Trust.  Let’s suppose a single parent, age 75, transfers the home to a Grantor Trust and retains a right to use and occupy.  At age 81, the parent goes to a nursing home. The five-year lookback period has expired.  The trust then sells the home and receives $400,000.  The $400,000 remains in the trust and is protected from Medicaid. The $400,000 can be invested, and the income earned is taxed to the parent, who was the grantor of the Grantor Trust.  Any monies the parent pays for care in the nursing home, i.e., Social Security, pension, etc., can be used to offset the earned income.

If the parent wants to downsize, the trust sells the home for $400,000, buys a condominium for $200,000, retains the remaining $200,000 in the trust, and the parent moves to the condominium.  The parent can continue to pay the expenses of maintaining the condominium as rent.  The principal residence exclusion can be retained.

  • Grantor Trust. Under the terms of this type of Grantor Trust, commonly called “Children’s Trust” or “Family Trust,” the grantor would have no access to income or principal. The trust could provide that the trustee, during the lifetime of the parent, could transfer the home to the children.  If the children are trustees and have the potential right to transfer assets to themselves, a Trust Advisor should be named.  A Trust Advisor can be anyone who is not a beneficiary of the trust. Typically, the Trust Advisor is the spouse of one of the children who is serving as trustee.  On death, the trust makes whatever provisions to the parent wants including transfer of the home to the children.  The parent can also reserve a power of appointment to change the disposition on death, so long as the power of appointment is not exercisable in favor of the client or the client’s creditors or estate.
  • The deed transfers title from the parent to the Grantor Trust.  There will be a five-year lookback for the transfer of assets by deed.  The deed would specifically retain the right to use and occupy.  It would specifically state that the grantor retained the obligation to pay real estate taxes, utilities, insurance and maintenance on the property, and would further specifically state that the grantor would not be entitled to any proceeds of sale or rental income from the property.
  • Buy Back. In the situation where a married couple transfers to a Grantor Trust retaining a right to use and occupy, there is the additional benefit that the Community Spouse could buy the home back from the trust for the Medicaid value at a later date.

The home owned and occupied by the Community Spouse would be a non-countable asset.  For example, a healthy couple, both age 75, transfers property to a Grantor Trust.  Six years later, the husband enters a nursing home.  The wife can then purchase back the home for its Medicaid value.  The home occupied by the Community Spouse is a non-countable asset and the liquid assets transferred to the trust are a transfer for value, so there is no additional transfer penalty and the assets in the trust are protected.  Suppose, again, the value of the home is $400,000.  The advantage of this situation is that $400,000 of additional liquid assets can remain under the control of the couple until such time as the home is repurchased.  This strategy is particularly useful if the Institutionalized Spouse has a large IRA or other retirement account.  If the IRA is liquidated five years in advance of the Medicaid application, the tax would have to be paid at that time.  In the meantime, the Institutionalized Spouse may die.  By using the IRA to buy back the home, payment of the income tax is deferred until the IRA money is actually used.  At that point, it is a question of pay the tax or pay the nursing home, and it is usually cheaper to pay the tax.


Medicaid planning for the home is very complex, but very important to our clients.

[Read Part 1]