A Medicaid applicant’s home is typically his/her single largest remaining asset. Clients frequently ask me if there is any way to prevent their home from becoming subject to Medicaid spenddown rules.
Under Medicaid guidelines, a person’s “homestead property” is exempt from asset limitations if: (1) a nursing home resident intends to return to his/her home; or (2) the property is occupied by the person’s spouse, sibling, or minor or disabled child. If neither of these conditions can be met (and without further planning), the property becomes non-homestead property and therefore nonexempt (see PM-07-02-04-a); however, with enough planning, a home can be saved from spenddown by utilizing the “caregiver child exception.”
The caregiver child exception provides that a Medicaid applicant may transfer, without penalty, his or her “homestead” to the applicant’s “child” who “resided” in the homestead for at least two years “immediately” before the date on which the applicant was institutionalized and who “provided care” to the applicant which permitted the applicant to reside at home rather than in an institution or facility (see PM-07-02-20-b). Typically, a transfer pursuant to the caregiver child exception is made just prior to applying for Medicaid.
The child can prove that he/she resided at the home with tax returns, utility bills, a driver’s license, cancelled checks, or any other documentation containing the child’s name and the address for at least 2 years immediately prior to a parent’s Medicaid application. The final requirement can be satisfied by a physician’s letter stating that the child has been caring for his/her parent, and during that time, his/her parent was in need of care that would have otherwise required care in an institution.
Parents who wish to transfer their home to a child pursuant to the caregiver child exception should be aware of two problems associated with an outright transfer of a home. First, any real property tax exemptions (e.g., Senior Exemption or Senior Freeze Exemption) associated with the parent’s ownership of the home will be lost. Second, the child will acquire his/her parent’s cost basis in the property (i.e., “carryover basis”) which could result in a significant capital gains tax liability upon the sale of the property.
Assume that a parent purchases a home forty years ago for $50,000 and the property now has a fair market value of $300,000. After the home is transferred, the child would acquire a cost basis of $50,000 in the property, and, ordinarily, the sale of the home for $300,000 would generate a $250,000 capital gain to the child. This result can be avoided by the child maintaining the home as his/her primary residence for at least two years before selling the property. Internal Revenue Code Section 121 provides an exclusion from gross income for the sale of a principal residence if the property was owned and used by the taxpayer as the taxpayer’s principal residence for two of the five years preceding the date of the sale. The amount of the gain excluded is $250,000 for a taxpayer filing individually and $500,000 for taxpayers filing jointly.
The estate planning attorneys at Lavelle Law are happy to discuss whether the caregiver child exception can help you, and what other tools might be available to preserve your assets while maintaining Medicaid eligibility. If you have any questions regarding this article or would like to schedule a free one-hour consult, please do not hesitate to contact me by email at firstname.lastname@example.org, or phone at (847) 705-7555.