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| MEDICAID TREATMENT
OF THE HOME BEFORE AND AFTER ELIGIBILITY |
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MEDICAID
TREATMENT OF THE HOME By K. Gabriel Heiser Introduction This article will discuss the issues regarding treatment of the home of an applicant for and recipient of Medicaid coverage for long-term care in a nursing home. The home occupies a unique position in this context. This results from the fact that a home is an exempt asset when determining the resources available to an applicant for long-term care coverage by the Medicaid program 1 yet is an available asset to reimburse the state under the estate recovery rules, following the death of the Medicaid recipient. 2 In addition, it may be a countable asset if a gift is made of the home by the Medicaid applicant or his or her spouse. Exclusion of the Home The home of an individual applying for Medicaid is considered an exempt asset. 3 For these purposes, one’s “home” includes all contiguous land. 4 One’s home can be a house, condominium, mobile home, or portion of a multi-family dwelling in which the applicant resides. Intent to Return If the applicant moves out of the home into a nursing home, the home can continue to be an exempt asset. While some states count the home as an asset beginning six months after the applicant has moved out, such is not the case in Colorado . However, in order for the home to be exempt once the applicant moves out, the applicant (or a family member) must establish in writing that the applicant has an “intent to return” to the home, no matter how unlikely that return may be as a practical matter. 5 Occupancy by Family Member Whether or not the intent to return is established, if the home continues to be occupied by a spouse or dependent relative, the home will continue to be an exempt asset. 6 Effect on Eligibility Transferring the home into a trust, partnership, LLC, or corporation, will cause the home to lose its exempt status. 7 However, transferring the home back into the name of the applicant will “cure” this result. 8 Transfer Penalty and Exceptions Although the home may be exempt while owned by the Medicaid applicant, it becomes a countable asset if transferred without fair consideration to anyone other than: the spouse of the individual; a child who is under age 21, blind or totally and permanently disabled; a sibling of the individual who has an equity interest in the home and who resided in the home for at least one year immediately before the individual entered the nursing home; or a transfer to a child who resided in the home for at least two years immediately before the individual entered the nursing home, and who provided care sufficient to delay the individual needing nursing home care. 9 The above exceptions apply only to a transfer of the home. There is also a series of exceptions to transfers that apply to all asset transfers, which presumably would include the home. Under this rule, a transfer of the home would also avoid a penalty if transferred: to the individual’s spouse or someone other than the spouse “for the sole benefit of” the spouse; from the spouse to someone other than the spouse “for the sole benefit of” the spouse; to (or to a trust for the “sole benefit of”) a blind or totally disabled child; or to a trust for the “sole benefit of” any blind or totally disabled individual under age 65. 10 Transfers Into Joint Names Under the Colorado Regulations, transferring real estate into joint tenancy with right of survivorship with one or more joint tenants has the following results: adding one joint tenant to the deed is deemed a transfer of one half of the value of the real estate; adding two names is deemed a transfer of two-thirds; adding three names is deemed a transfer of three-fourths, etc. 11 This is contrary to Colorado law which permits an unequal joint tenancy with right of survivorship if so stated in the deed. 12 The apparent goal of these Regulations was to prevent transferring a small percentage interest to a child (thereby minimizing the transfer penalty) while permitting the home to pass to such child by right of survivorship upon the parent’s death (thereby escaping estate recovery for past Medicaid benefits paid on behalf of the parent). Sale of the Home If the home is sold, the proceeds become countable assets beginning the first day of the month following the month it is no longer the applicant’s principal place of residence. 13 Too often the attorney is faced with new clients who have already sold the family homestead, believing that they had to do so to pay for the nursing home. Unfortunately, that forecloses any ability to protect the home following the death of the owner. However, if cash is needed to pay for assisted living expenses, sometimes the only alternative is to sell the home (unless family members are willing to lend money for such care, securing the loan against the house). Life Estate Transfers Transferring the home to one or more children and retaining a life estate results in a smaller penalty than a transfer of the entire interest in the home. The value of the gift may be calculated by referring to the table at HCPF Reg. § 8.110.54. You start with the attained age of the transferor, find the remainder factor from the table, and multiply that factor times the “actual value” from the most recent property assessment notice. 14 For example, if the home is valued at $300,000, and the transferor is age 75, the factor from the table is .47851, so the gift is $143,553. This will then cause a penalty period of 28.2 months. 15 Thus, the life estate deed has two main benefits: a reduction in the penalty period (as compared to a gift of the entire fee) and avoidance of estate recovery upon the death of the transferor/Medicaid recipient, because title then vests automatically in the remaindermen, bypassing probate (see “Estate Recovery,” below). “Lady Bird” Deeds So-called “Lady Bird” deeds are popular in some states as a method to avoid estate recovery. It is a deed transferring the home typically to younger family members, with the retention not only of a life estate but the unlimited power of disposition. Since the grantor has not parted with dominion and control and can essentially revoke the transfer at any time by simply deeding the same property to someone else prior to the grantor’s death, the conveyance does not incur a transfer penalty. Nonetheless, the deed removes the property from the grantor’s probate estate, avoiding estate recovery in those states that only look to the probate estate for recovery. Under Colorado case law 16, however, such a deed is deemed to be testamentary in character, since no present interest passes. Since the deed is never executed with the formalities of a will, it is noneffective as a conveyance; if it were executed as a will, then the real estate would still be in the probate estate, defeating the main purpose of the deed. Hence, such technique is unavailable for Colorado real estate.
Rental of the Home If homeowner moves into a nursing home, the former residence need not be rented out, but it certainly can be. For an unmarried homeowner the net rental amount will be deemed countable income and must be paid to the nursing home. If the homeowner has qualified for Medicaid coverage, such income will simply reduce the Medicaid payments to the nursing home but will otherwise not benefit the homeowner financially. However, often there is no other way to pay for the necessary upkeep of the house—the real estate taxes, assessments, insurance, etc.—during the time between the homeowner moving out of the house and the sale of the house. The homeowner’s children simply may not be willing or able to foot those bills themselves, so even a small amount of rent would cover those necessary expenses. Liens The state may file a lien against the home for the amount of Medicaid payments made if (i) the Medicaid recipient cannot reasonably be expected to be discharged from the nursing home and return home, (ii) there is no spouse living in the home, (iii) there is no child under age 21 or blind or disabled dependent of the recipient living in the home, (iv) there is no sibling of the recipient living in the home who has an equity interest in the home and who was living there for at least one year immediately prior to the date the recipient entered the nursing home, and (v) later recovery from the estate is likely to be cost-effective. 17 Any lien imposed will dissolve should the individual leave the nursing home and return back home. 18 Estate Recovery Under Federal law, all states must seek recovery for Medicaid payments made on behalf of a nursing home resident who was at least age 55 when the individual received such assistance. 19 Such recovery may only be against the individual’s “estate” as defined for purposes of state probate law unless the state enacts legislation to expand the definition of “estate.” 20 At present, Colorado has not done so. Thus, upon the death of the nursing home resident, the state will seek reimbursement from the deceased resident’s probate estate. For a single individual, in virtually all cases, the only major asset in the probate estate of the resident will be the former home, since it was exempt during the resident’s lifetime. Unless the home can somehow avoid inclusion in the Medicaid recipient’s probate estate, it will have to be sold to pay back the state, upon the Medicaid recipient’s death. The home will avoid inclusion in the probate estate if (i) it was titled in joint names with right of survivorship, (ii) only a life estate was retained in the home, (iii) it was titled in the name of a revocable trust, or (iv) it was transferred by a beneficiary deed. 21 Only the first two options are applicable to Medicaid planning, because titling the home in the name of a living trust or by beneficiary deed will immediately cause the home to lose its exempt status; in addition, anyone who has conveyed an interest under a beneficiary deed will be denied Medicaid coverage. 22 Effect of Elective Share Right A surviving spouse has a right to elect to receive a certain percentage of the deceased spouse’s augmented estate, no matter what the deceased spouse’s estate plan says. 23 The failure of the nursing home spouse to elect a share of the deceased spouse’s estate will be deemed for Medicaid eligibility purposes to be a gift of property equal to the value of the elective share. If the nursing home spouse is already receiving Medicaid, he or she will be disqualified for many months as a result of this deemed “gift.” 24 Thus, simply having the community spouse devise the home to the children may not be the best solution. However, under Colorado law, an elective share may be satisfied with the commuted value of a trust interest. 25 Thus, it would be possible to have the community spouse leave a percentage of the value of the house (plus the value of other assets that form part of the augmented estate) into a trust for the benefit of the nursing home spouse that pays a unitrust or annuity trust amount (i.e., a fixed percentage of the trust value— or a fixed dollar amount—per year). Although the Colorado statute does not set forth a method to calculate the commuted value, a reasonable approach would be to look to IRS tables to determine the value of the unitrust/annuity trust amount. In line with the foregoing, it should be noted that—at least for federal tax purposes—the tables may not be utilized when the individual whose life is being measured has a terminal illness and at least a 50% chance of dying within one year. 26 The community spouse’s will may then include a formula so that just enough goes into the trust to satisfy the elective share. Upon the nursing home spouse’s death, no part of the trust will be available to satisfy state Medicaid recovery claims (under current law). Example: Community spouse dies owning $100,000 of cash and a house worth $400,000. Nursing home spouse is age 70. A 5% annuity trust values the life interest at approximately 45%. Assuming a marriage of at least 10 years, the surviving spouse is entitled to an elective share equal to 50% of the augmented estate, i.e., $250,000. 45% of x = $250,000, so x = $555,555, which is more than the entire estate! Thus, we must increase the payout. At 5.6%, the entire estate will be in the trust for the nursing home spouse. 5.6% of $500,000 means that $28,000 per year must be paid to the nursing home spouse for the remainder of her life. Upon her death, the trust leaves everything to the spouse’s then living descendants, and the state gets nothing (under current law). Now compare the above to leaving $250,000 outright to the surviving nursing home spouse: If the nursing home spouse dies a year later, estate recovery will eat into the remaining portion of the $250,000, for all prior Medicaid expenditures. Under the above approach, only the $28,000 a year—for however long the nursing home spouse lives after the death of the community spouse—is “lost.” Under the commuted value option, the older the nursing home spouse, the greater the payments required to that spouse. At some point, the nursing home spouse’s age, combined with a higher value of the augmented estate itself, will mean that the monthly payments to the nursing home spouse will exceed the Medicaid maximum, thereby disqualifying the nursing home spouse (most likely for the rest of the nursing home spouse’s life). But in any event, you’ve still avoided estate recovery for all the prior years the nursing home spouse was receiving Medicaid. Again, compare this result to that obtained if the nursing home spouse received the elective share amount outright: not only would the nursing home spouse be disqualified immediately (based on excess assets) but the elective share assets would be subject to estate recovery at the nursing home spouse’s death. Although a transfer in exchange for an irrevocable private annuity is deemed a transfer of the entire amount (giving no value to the retained interest), 27 the issue here is not whether any value is given to the annuity payments under Medicaid law, but simply whether value is given under the elective share law (which it clearly is, per the statute above). Current Medicaid rules may not be read so as to deem the annuity payments to have zero value. All they can do is indicate that “the failure to elect a share of a spouse’s estate” is a transfer without fair consideration. 28 Also, while it does mean that $28,000 ($2,333 per month) is going to the nursing home, the nursing home spouse is still on Medicaid, so the lower daily Medicaid payment rates for the nursing home are used, saving the family additional money. Finally, the assets inside the trust may well appreciate more than the 5.6%, meaning that essentially the entire value of the property will ultimately pass to the children, no matter how long the nursing home spouse lives. K.
Gabriel Heiser is a Boulder attorney
whose practice is limited to estate planning and elderlaw. 1. Staff Manual Volume 8 – Medical Assistance, Colorado Dept. of Health Care Policy and Financing, Regulation (hereinafter “HCPF Reg.”) § 8.1 10.51A 2. 42 U.S.C. §§ 1396p(b)(1) and (4) 3. 42 USC § 1382b(a)(1) 4. Id. Note, however, that the Colorado Regulations define an exempt home as “The principal place of residence which is owned by the applicant or applicant’s spouse, including the home in which the individual resides, the land on which the home is located and related out-buildings.” HCPF Reg. § 8.1 10.51 .A 5. HCPF Reg. § 8.110.51.A.1.d 6. Id. 7. HCPF Reg. § 8.110.51.A.1.e 8. Id. 9. 42 U.S.C. § 1396p(c)(2)(A); HCPF Reg. § 8.110.53.F.1 10. 42 U.S.C. § 1396p(c)(2)(B); HCPF Reg. § 8.110.53.F.2 11. HCPF Reg. § 8.110.53.E.3.1 12. Duston v. Duston (31 Colo. App. 147, 498 P.2d 1174 (1972)) 13. HCPF Reg. § 8.110.51.A.1.c 14. HCPF Reg. § 8.110.54.A 15. The current penalty divisor (i.e., the amount of a gift that will result in one full month of penalty) for Colorado is $5,092, so $143,553/$5,092 = 28.2. 16. Dunham v. Armitage, 97 Colo. 216, 48 P.2d 797 (1935) 17. HCPF Reg. § 8.063.13 18. 42 U.S.C. § 1396p(a)(3) 19. 42 U.S.C. § 1396p(b) 20. 42 U.S.C. § 1396p(b)(4) 21. CRS § 15-15-401 et seq. 22. CRS § 15-15-403. 23. CRS § 15-11-201 et seq. 24. HCPF Reg. § 8.110.53.D.4 25. CRS § 15-11-202(4) 26. Treas. Reg. § 25.7520-3(b)(3) 27. HCPF Reg. § 8.110.53.D.7 28. The surviving spouse will always have the power to disclaim the interest under the trust [CRS § 15-11-203(1 )(a)]. Since the disclaimed assets would not be counted as part of the elective share, and the probate assets before being funded into the trust would then be utilized to satisfy the elective share [id.], a disclaimer by the surviving spouse could well defeat the carefully planned annuity/unitrust provisions. However, it is the author’s opinion that since the disclaimer would not affect the value of the elective share but only the form, there would be no “transfer without fair consideration”—and hence no penalty—should the surviving spouse or spouse's legal representative fail to make such a disclaimer. |
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Boulder ElderLaw
Law Office of K. Gabriel Heiser 4845 Pearl East Circle, Suite 101 Boulder, CO 80301 Ph:(303) 447-6855 fax: (888) 301-9466 
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