Can I lose my home to Medicaid estate recovery?

Medicaid

Medicaid is a joint state and federal program that was created to help individuals with limited resources pay certain medical and related costs. It is used to a large extent to cover things such as long-term care for elderly individuals.

To qualify for Medicaid, you must meet the requirements of a means test. While it varies from state to state, generally, it means that elderly individuals applying for Medicaid are restricted to having no more than $2,000 in assets. There are certain exceptions, such as an individual's primary residence, vehicle or wedding rings.

If an individual finds that they exceed these limits but cannot afford to fund their own long-term care, they have two options. They can either spend down their assets or have an estate planning strategy to protect them. Medicaid eligibility rules can be incredibly complicated, and the rules are applied differently depending on what state you live in.

Note that Medicaid is often confused with Medicare. Medicare is an insurance program for individuals over 65 (or younger disabled individuals) regardless of their income level or assets. Medicare recipients have paid into the system and are still responsible for paying part of the costs. Also, Medicare does not pay for long-term care.

Medicaid estate recovery

For those planning their estates, it's a scary thing to think that you can lose assets you spent a lifetime accumulating to pay for long-term care instead of providing for your family. For many heirs, they have been taken by surprise after their loved one died to find out that the inheritance they thought they were going to receive is actually going back to the state.

Medicaid estate recovery comes on the back end. It is a congressionally mandated system that is designed to recover assets to pay for medical services that were initially funded by Medicaid. This became a federal requirement for states with the passing of the Omnibus Budget Reconciliation Act of 1993. This law requires states to recover a decedent's assets for the purpose of paying for services Medicaid covered for individuals who were over the age of 55 when they received Medicaid.

When the legislation was debated, Congress argued that Medicaid estate recovery was necessary to create an incentive for people to plan for their long-term care and strike a balance between making sure Medicaid was used by those truly in need while not forcing individuals to lose all of their assets to qualify. Whether or not it has adequately met that requirement is a whole different conversation.

At a minimum, this law requires states to file a claim in probate court against the Medicaid recipient's estate to pay for any services Medicaid covered. When a Medicaid beneficiary passes away, the decedent's state of residence will then become a creditor. Most states make Medicaid a priority creditor, which means it is the first in line to receive any assets from an individual's estate. In this situation, heirs will only be able to receive an inheritance after the Medicaid claim is fully paid.

While states are required to go through the probate process, they may also elect to pursue assets by other means as well. For instance, sometimes liens are placed on the property of a Medicaid beneficiary. This can occur when a recipient of Medicaid pays a portion of the cost of their long-term care as a condition of receiving Medicaid.

If it is determined that the individual is not likely to be discharged and returned home, they can place a lien on the property while the individual is still alive. This prevents the property from being sold or transferred while the individual is receiving Medicaid benefits. If the Medicaid beneficiary does leave the long-term care facility and return home, then a release of the lien will have to be filed.

When it comes to the one asset that most people are primarily concerned about losing to Medicaid, the house is usually at the top of the list. It is at least a small comfort to know that there are some limits to the state's ability to seek recovery against the value of real estate, even if you did not take specific steps to protect the property. In the following scenarios, the state is not allowed to take your home as part of Medicaid estate recovery:

• Hardship cases - States are required to develop procedures to waive recovery if it is determined that it would result in undue hardship. This exception is usually in unique situations such as if a property subject to recovery was the sole income-producing asset of the beneficiary. This could be the case if the property was, for instance, a family farm or business.
• Spouse - If there is a living spouse, regardless of where they live.
• Child - If the decedent has a child either blind, disabled or under the age of 21, no matter where they live.
• Non-disabled adult child - If your adult child lived in the home in question for at least two years prior to an individual's admission to a nursing home and provided care that delayed the need for admission and that child has lived continuously in the home since that date.
• Sibling equity interest - If an individual has a sibling that has an equity interest in the home and lived in it for the year prior to one's nursing home admission as long as the sibling has continuously lived in the home since that date.

Life estates

A life estate is typically used for real estate and is a form of joint ownership that gives one person (the life tenant) the sole right to occupy and use the property during their lifetime and the other, the remainderman, a future interest in the ownership of the property when the life tenant dies. Here is some important information to help you better understand how life estates work:

• Grantor - A life estate is created by a person who owns a property known as a grantor. Usually, the life tenant is also the grantor but it is not a requirement.
• Remainderman - A remainderman can be one or more individuals, an entity or even an irrevocable trust. The key is that the remainderman cannot be the same person as the life tenant. They have a future interest in the property as well as a current interest if the life tenant takes certain actions such as selling or refinancing the property.
• How they are created - Life estates are usually created by a deed but can also be created by a will or trust.
• Life estate vs. irrevocable trust - Life estates are similar to irrevocable trusts except for the fact that life estates can provide a present benefit while irrevocable trusts are more focused on simply transferring assets to one's beneficiaries. Essentially, a life estate gives you the best of both worlds by allowing the grantor to transfer the property while still having the right to use it for the rest of their life.

A life estate simplifies the transfer of a property. When the life tenant dies, the title to the property is automatically transferred to the listed beneficiary, known as a remainderman. As a result, the life tenant has a present ownership interest while the remainderman has a both a present and future interest in the real estate.

Based on these ownership interests, both parties are provided different rights and obligations. The life tenant has the right to live in the property and collect rental income as well. However, the life tenant has certain obligations that the remainderman does not have to worry about. Those include:

• Real estate taxes
• Maintenance
• Insurance
• Capital gains tax exclusion for personal residence

It's important to note that a life estate cannot be created if the real property is subject to a mortgage. This tool can only be used for a property fully owned by an individual.

Here are some important aspects of life estates you should better understand if you decide to use a life estate for estate or Medicaid planning purposes:

1. Selling or refinancing the life estate property - A life tenant can only sell or mortgage the property with the explicit agreement of the remainderman. If the remainderman does agree to a sale of the property, they are entitled to a portion of the proceeds based on a predetermined scale using the life tenant's age and current interest rates.

   The older a life tenant is when the sale occurs, the greater the share is for the remainderman. Likewise, a remainderman is under the same obligation while the life tenant is alive. That means if the tenant becomes incapacitated, the remainderman is not allowed to sell or refinance the property.

2. Limited rights - While both parties have rights in a life estate, it's important to know, especially as a grantor, that once you create the life estate, you no longer have the same rights as a sole owner. For instance, a grantor cannot later reverse a life estate transfer or change the remainderman.


3. Liability of remainderman's life events - Property in a life estate is subject to any life events of the remainderman, including judgments and divorce. As a result, a lien can be placed on the property and collected on if the property is sold, even while the life tenant is still alive.

   Life events also include the death of a remainderman. If this occurs, the remainder interest of the life estate goes to the remainderman's heirs. This could put the life tenant in a difficult position depending on who those heirs are.

4. Enhanced life estate deeds - In a couple of states, Michigan and Florida, they have a unique type of life estate that does not carry with it many of the restrictions on grantors that are found in a traditional life estate. Benefits to the grantor include:
   • The beneficiary is not considered a joint owner but, instead, is provided only a future interest in the property.
   • The grantor can change the beneficiary at any time.
   • The life events of a remainderman discussed above are not subject to the property until the grantor passes away.
   • The grantor can mortgage or refinance the property without the beneficiary's agreement.

Now for the million-dollar question. Understanding what Medicaid estate recovery and a life estate is, the important question is, how does a life estate protect your home when Medicaid begins their estate recovery process. Life estates can be an excellent tool in probate-only states as part of estate and Medicaid planning to protect one's home from later attempts by Medicaid to use the asset to pay for Medicaid services provided to an individual.

Setting up a life estate can help shield a primary residence Medicaid estate recovery. With a life estate, the life tenant's right to the property ends at death.

As a result, the property does not go through probate because the beneficiary (i.e. remainderman) takes ownership of the property immediately. Since it does not go through probate, the property is not considered part of the estate and, thus, not subject to Medicaid estate recovery.

Individuals planning to use a life estate should be aware of its limitations when estate planning. Here are a couple of situations where a life estate will not protect your home from Medicaid estate recovery:

• Look-back period - Timing is important, and creating a life estate does not automatically protect the property from Medicaid estate recovery. For instance, Medicaid has a five-year look-back period that was developed to avoid abuse in the Medicaid system. The five-year look back period means that if a life estate is created less than five years before applying for Medicaid, it may still be considered as your property for Medicaid eligibility purposes and may still be subject to later recovery
• Expanded “estate” definition - Certain states have an expanded definition of “estate” for Medicaid estate recovery purposes. Under this expanded definition, any property that an individual had any legal title or interest in at the time of their death may be used to pay Medicaid costs. This even includes assets traditionally outside of probate such as joint bank accounts (or accounts with a pay-on-death beneficiary), living trusts and real estate held in joint tenancy.

Also included, unfortunately, are life estates. This expansive approach to Medicaid estate recovery allows for the recovery of assets in which the decedent's property interest is completely extinguished and unable to be recovered by other traditional creditors.

Medicaid is often a necessity, and a life estate may be a great way to protect your home from being completely lost in Medicaid estate recovery. However, it is important to know your state's requirements and the general limitations on the use of life estates. As with all aspects of estate planning, it is important to have a well-considered plan in place and avoid waiting until it is too late.