Going into a nursing home is a huge, scary life change for many people. On top of having to deal with that, you don’t want to also be worrying about how it will impact your kids – particularly their inheritance.
Sadly, that is the exact situation many older people find themselves in. Misunderstandings about transferring property can create unintended financial consequences that you – and your loved ones – really don’t want to have to deal with. Two key issues to consider are the spend-down of assets and the Medicaid Estate Recovery Program (MERP).
Let’s explore all of this a bit more deeply so that you can make decisions that will help you minimize potential problems – both for yourself and your children.
Medicaid and the Spend-Down Process
Medicaid is one of the most common ways that people in our country pay for long-term nursing home care. According to recent statistics, 1 person out of 3 living in a nursing home receives Medicaid benefits.
However, to qualify for Medicaid, you must have limited assets and your monthly income must also be below a certain threshold. If your assets exceed either of the limits set, you have to take certain actions like “spending down” those assets before you can receive Medicaid.
That being said, the myths surrounding how to qualify someone for Medicaid are numerous. Please let us help you understand this a little better.
What Exactly Is “Spending-Down”?
Let’s start with what it isn’t. There is a myth that a person must spend down “everything” and only have about $2,500 in assets in order to qualify for Medicaid in Texas.
But if you dive a little deeper, there are exceptions (“exemptions”) to this rule. You can have certain assets and the assets aren’t “counted” because they are “exempt” from what the officials consider assets.
- Homestead of any value (if married – there is a limit on the value of the home if unmarried)
- One vehicle (can be any value)
- Funeral Arrangements (if pre-paid and with no rights to cancel later)
- All personal belongings and household furnishings
- IRAs and 401K plans (so long as they are in payout status)
- Business property (if essential to support the spouse not going into the nursing home)
- Livestock
Because of the above, in certain situations, an elder law attorney will advise their client to upgrade to a more expensive home or vehicle, update kitchens and baths, or do other renovations to the home to “spend down” assets before applying to Medicaid. Still, this is often not enough – and it can be daunting to “waste” assets you saved your whole life when you are most vulnerable.
Instead, people often want to “give” assets to children or other loved ones they trust. Unfortunately, this situation is tricky as well. If the gift isn’t given at least five years before nursing care is needed, the Medicaid officials are still going to “count” the assets as yours.
Estate planning and Elder law attorneys can usually help with this, but families often choose to not consult one. This is a huge mistake, because if assets are not gifted in a manner allowed, it can trigger Medicaid penalties and delay eligibility – something no one wants.
Medicaid Estate Recovery Program (MERP)
Medical care is expensive – especially as we age and need more of it. Because so many people cannot afford to pay for nursing and medical care in their old age, there is Medicaid. However, what people often don’t realize is that when a person passes away, the government will try to recover what was paid by Medicaid if assets are available; this is MERP.
For example, if Medicaid covers your nursing home care, the government can recover the cost of that care from your estate after your death. Often, this means the state taking ownership of and selling your home.
How MERP Works
After you pass, the state may file a claim against your estate. If your home is in your name at death, it may need to be sold to repay Medicaid. Some exemptions exist, such as if a surviving spouse or disabled child lives in the home.
Can’t You Just Transfer Your Home to Your Kids So It’s Not In Your Name?
Many people consider transferring their home to their children while they’re still alive to avoid Medicaid recovery. However, there are a couple other considerations to take into account when determining whether or not this option is for you.
- Medicaid Look-Back Period and Penalties
As mentioned earlier, Medicaid imposes a five-year look-back period on asset transfers. If you give away your home and apply for Medicaid within the next five years, you may face a penalty period during which you are ineligible for benefits or encounter additional problems.
- Tax Consequences for Your Children
When you transfer a home during life, your children inherit your original cost basis (the price you paid for the home). When the home is later sold, this can result in higher capital gains taxes. This is one of the most tremendous mistakes we often seen in DIY estate planning.
By contrast, if your loved ones inherit the home at your death, they receive what is called a step-up in basis. This means the IRS will not go back to the value of the home when it was purchased. Instead, they will only go back to the “date of death” to get a starting value of the home.
Because of this, your loved ones will only pay taxes based on how much the house/property increased in value from the date you died to the date they sell the home. In simple terms, this tends to mean they pay significantly less in taxes.
- Loss of Control and Risk
Once you transfer your home, your children legally own it. If they have a car accident and get sued, child support obligations, tax issues, or experience other financial issues during your life, your home is at risk of satisfying claims against them. The home could even be at risk of seizure by creditors or legal claims.
Additionally, what if you and the child (who perhaps thinks they are acting in your best interest) have a disagreement about when you are no longer able to live in the home, or something else along those lines? Because you legally no longer own the home, you are no longer in control.
Better Alternatives to Protect Your Assets and Your Children
Instead of an outright transfer of your assets to your kids, consider these strategies:
Life Estate Deed. This allows you to retain control of your home during your life while ensuring it passes to your child or loved one without going through probate. As a nice bonus, it also protects you from MERP claims.
Once a life estate interest is given, you can’t change your mind later and give it to someone else or sell the property unless your child or loved one agrees. This can be helpful in situations where there is concern that it might be given to “the wrong person,” such as a caregiver or a spouse that comes into a 99-year-old person’s life shortly before death.
Transfer on Death or Ladybird Deed. This, like the Life Estate Deed, allows you to retain control of your home during your life while ensuring it passes to your child or loved one without going through probate. It, too, also protects against MERP claims.
However, with this type of deed, you can change your mind later without the permission of a child or loved one. You also do not have permission to later sell your home if you wish. You retain complete and total control during your life.
Certain Types of Trusts. In certain situations, a properly structured trust protects your assets while allowing Medicaid eligibility.
Certain Medicaid-Compliant Annuities. These annuities convert assets into income. In some limited situations, this can enable you to qualify for Medicaid while preserving wealth.
The bottom line is that paying for nursing home care can have significant financial consequences for your children – especially if Medicaid is involved. Rather than making a risky property transfer, consider legal strategies that protect your assets while maintaining your Medicaid eligibility.
Obviously, this is not a simple or straightforward problem to deal with. Ensure you’re making the best decisions for you and your family by getting in touch with us. We’ve worked with lots of people who are struggling to deal with this issue, and we understand how to create a strategy that fits your situation and creates the best outcome for everyone involved.
Now is always the best time to deal with problems like this. Reach out and we’ll talk through a plan together to make sure you and your loved ones are protected.