Protecting Your House from Medicaid Estate Recovery
After a Medicaid recipient dies, the state must attempt to recoup from his or her estate whatever benefits it paid for the recipient’s care. This is called “estate recovery.” Medicaid estate recovery was the subject of an article by the National Care Planning Council whcih can be found here: Common Strategies to Protect the Home from Medicaid Recovery. Although some of the strategies in that article do not apply to Louisiana, the article discusses an important topic, such being, that even though your home is “exempt” on the “front end” if you have to go into a nursing home, if Medicaid pays for your care over a substantial period of time (generally about 9 months to a year) and your home is valued more than approximately $80,000 (depending on your Parish of residence), the home can be seized on the “back end” when you pass away.
For most Medicaid recipients, their house is the only asset available, but there are steps you can take to protect your home.
For many people, setting up a “usufruct” is the simplest and most appropriate alternative for protecting the home from estate recovery. A usufruct is a form of joint ownership of property between two or more people. They each have an ownership interest in the property, but for different periods of time. The person holding the usufruct possesses the property currently and for the rest of his or her life. The other owner (the “naked owner”) has a current ownership interest but cannot take possession until the end of the usufruct, which occurs at the death of the person holding the usufruct (the “usufructuary”).
Example: Jane gives a naked ownership interest in her house to her children, Robert and Mary, while retaining a usufruct for life for herself. She carries this out through a simple act of donation. Thereafter, Jane, the usufructuary holder, has the right to live in the property or rent it out, collecting the rents for herself. On the other hand, she is responsible for the costs of maintenance and taxes on the property. In addition, the property cannot be sold to a third party without the cooperation of Robert and Mary, the naked owners.
When Jane dies, the house will not go through probate, since at her death the ownership will pass automatically to the naked owners, Robert and Mary. Although the property will not be included in Jane’s probate estate, it will be included in her taxable estate. The downside of this is that the property may be subject to estate taxation. The upside is that this can mean a significant reduction in the tax on capital gains when Robert and Mary sell the property because they will receive a “step up” in the property’s basis.
As with a transfer to a trust, if you transfer the deed to your home to your children and retain a usufruct, this can trigger a Medicaid ineligibility period of up to five years.
Usufructs are created simply by executing a deed or act of donation conveying the naked ownership interest to another while retaining a usufurct for life. If the lookback period has run or the penalty period has expired, the State of Louisiana cannot recover against it for any Medicaid expenses that the usufructuary may have incurred.
Another method of protecting the home from estate recovery is to transfer it to an irrevocable trust. Trusts provide more flexibility than usufructs but are somewhat more complicated. Once the house is in the irrevocable trust, it cannot be taken out again. Although it can be sold, the proceeds must remain in the trust. This can protect more of the value of the house if it is sold. Further, if properly drafted, the later sale of the home while in this trust might allow the settlor, if he or she had met the residency requirements, to exclude up to $250,000 in taxable gain, an exclusion that would not be available if the owner had transferred the home outside of trust to a non-resident child or other third party before sale. Furthermore, an irrevocable trust has the added benefit of allowing you to transfer other assets in addition to your house, such as bank accounts and liquid assets, to protect those other assets from Medicaid.
BOOK A CALL with me, Ted Vicknair, Board Certified Estate Planning and Administration Specialist, Board Certified Tax Law Specialist, and CPA to learn more about estate planning, incapacity planning, and asset protection.
If you liked this article, “Protecting Your House from Medicaid Estate Recovery” read also these additional articles: How Do I Plan for Taxes after Death? and How to Find a Great Estate Planning Attorney and What Happens Financially when a Spouse Dies? and What the Latest Dementia Study Says about Links with Certain Medicines