PROTECTING THE PRIMARY RESIDENCE

FROM THE COST OF A NURSING HOME

*By Anthony J. Enea, Esq.

Approximately 10 years ago I had my first encounter with the disastrous consequences that result when clients fail to take the necessary steps to protect the primary residence from the cost of a nursing home. An elderly couple had consulted with me regarding a plan for protecting their assets in the event either one of them needed to enter a nursing home. At the time of the consultation the husband had serious health issues, however, his wife was in relatively good health. I made a number of different recommendations to the clients, including, that their largest asset, their home be transferred from the husband to the wife. Such a transfer is known in Medicaid parlance as a Aspousal transfer@, thus, it is an exempt transfer, which does not create a period of ineligibility for Medicaid. Social Services Law '366(5)(d)(3)(ii)

Unfortunately, the clients decided not to implement my suggestions. As is often the case, approximately a year later I received a telephone call from the couple=s daughter advising me that Dad had been placed in a nursing home as a result of senile dementia, and that Mom had just passed away. As a result of title to the home being jointly held with his wife, title to the house had now passed by operation of law to the husband. Thus, the primary residence was now an asset against which Medicaid could place a lien against. Social Services Law'369(2)(a)(ii), 42 U.S.C.A. '1396p(a)(1) Thus, Medicaid could recover from the proceeds of the sale of the home, the Medicaid benefits paid for the nursing home care of the father.

As a result of the failure to implement a plan to protect the home upon the father=s death, Medicaid was paid from the proceeds of the sale the entire amount of its lien for Medicaid benefits paid, which unfortunately for the family was approximately 75% of the total net proceeds of the sale.

With the average cost of a home in Westchester County being in excess of $300,000, it is not unusual for the primary residence to be the most valuable asset one owns. Thus, taking prudent steps to protect the residence are well worth the effort.

For Medicaid purposes the primary residence is known as the Ahomestead@ and is an exempt asset (does not effect eligibility for Medicaid) so long as it is occupied by the applicant, the applicant=s spouse or the applicant=s minor, disabled or blind child. Social Services Law'366(2)(a), 18 NYCRR '' 360-1.4(f) The homestead can be a one, two or three family home, condo or co-op and still be exempt for Medicaid eligibility purposes, however, any net income is not exempt. 18 NYCRR '360-1.4(f), '360-4.3(d). However, as is stated above, the homestead is an asset against which Medicaid can have a lien against.

In compliance with federal statute, New York has an estates recovery program in place. 42 U.S.C.A. '1396 p(b)(1), Social Services Law '' 104, 369.

The homestead can be transferred to five (5) categories of people without affecting Medicaid eligibility:

  1. Spouse;
  2. Minor Child
  3. Disabled or blind child of any age;
  4. Adult child who has lived in the home of the parent for at least two years prior to the parents institutionalization and who has been a care giver to the parent.

In recent years, I have found this to be an effective planning option. For a variety of socio-economic reasons, it is not unusual for an adult child to be residing with his or her parents. Additionally, the care giver requirement has been loosely interpreted.

  1. A sibling of the Medicaid applicant who has resided in the home for at least one year prior to the institutionalization and who has an equity interest in the home.

Thus, if you are able to utilize any of the aforestated transfers, no effect would result from a transfer for Medicaid eligibility.

Once a decision has been made to transfer the primary residence, whether it be as an exempt transfer or a non-exempt transfer (one that will create a period of ineligibility for Medicaid) a variety of estate tax, gift tax as well as capital gains tax considerations need to be made. Does the client want to reserve a life estate or does the client want the transfer to be made outright or to an irrevocable trust. These are issues that need to be fully explored with and reviewed with the client.

A non-exempt transfer of the homestead with the retention by the transferor of a life estate in the transferred property often gives the transferor the comfort of knowing that he or she will have the legal right to remain in the premises for the remainder of his or her life. Additionally, the penalty period for Medicaid created by the transfer would be determined by the monetary value attributed to the life estate as determined by the actual value of the life estate as established in the tables of the Health Care Financing Administration of the United States (HCFA). Dept. of Health and Human Services Health Care Finance Administration State Medicaid Manual Transmittal No. 64. The reservation by the transferor of the life estate, will also allow the transferee to receive a full step up in the cost basis of the property to its fair market value on the date of the life tenant=s death. However, the client should be advised that if the premises are sold prior to the life tenant=s demise, that there will be capital gains tax consequences to the transferee resulting from the loss of the step-up in cost basis. Additionally, the transferor would have to be compensated for the value of the life estate relinquished, which may have an impact on Medicaid eligibility.

Another commonly utilized Medicaid planning option relevant to the primary residence is the transfer of the residence to an irrevocable trust. Title to the premises is deeded to the trustees of the trust and the transferors are granted the right to reside in the premises for their lives. A non-exempt transfer of the homestead to an irrevocable trust would create a period of ineligibility for Medicaid equal to the value of the residence divided by the monthly average cost of nursing home care in the Court where the applicant resides. For example, in Westchester County the average cost of the nursing home is deemed to be $6,668.00 per month.

The transfer to the irrevocable trust has some estate and gift tax advantages which make it preferable to an outright transfer without a life estate of the residence. For example, the transfer to the trust can be structured so as to avoid any gift taxes and to allow the beneficiaries of the trust to receive a step up in cost basis upon the demise of the transferor as well as allowing the continued availability of the principal residence exclusion for capital gains tax purposes.

Irrespective of which specific measures are taken to protect the primary residence, the critical element is that some steps be taken to do so. As I often tell clients, until the premises are transferred nothing has been done to protect the asset from the costs of a nursing home.