Almost everyone realizes that medical care at the end of life can be incredibly expensive. Even though Medicare and private insurance may be available, the unreimbursed cost of hospital stays, medicines, and institutional care, including nursing home care, may be unaffordable for the senior or his family. Because of this, Medicaid, a federal poverty support program, remains the largest payer of long-term medical care expenses in the United States, paying 62% of the nation’s long-term medical care costs.
MEDICAID ESTATE RECOVERY
Many believe Medicaid to be another health insurance program like Medicare, but it is not. When a senior uses Medicaid to pay his care bills, Medicaid counts and records every dollar spent on the Medicaid recipient. Following the Medicaid recipient’s death, Medicare will place a lien on the recipient’s estate for every dollar Medicaid spent during life, through a program called Medicaid Estate Recovery.
The estate’s Medicaid bill can be tens of thousands of dollars. Because the home is frequently the most valuable asset left in a senior’s estate, and because the probate process requires an estate to pay all valid estate bills before distributing remaining assets to the deceased senior’s beneficiaries, the home must often be sold to pay off estate creditors. If the senior intended to pass down the home to a loved one following his death, Medicaid Estate Recovery can prevent the home from reaching that loved one.
Medicaid Estate Recovery is prohibited if the deceased Medicaid recipient is survived by a blind or disabled child of any age, a child under age 21, or is survived by a spouse. But Medicaid Estate Recovery can continue once the spouse has died.
PROTECTING THE HOME FROM MEDICAID ESTATE RECOVERY
Medicaid laws are complex. During life, a senior’s home is normally not a “countable asset” if the senior is trying to qualify for Medicaid, as long as the senior has the “intent to return” to his home even while he resides in managed care or a nursing home, or as long as his spouse or other dependent relatives live in the home. But even though the home is not a countable asset when qualifying for Medicaid, it can still be attached by Medicaid Estate Recovery after the senior dies, as discussed above.
The JTWROS Deed
At this time, the North Carolina Medicaid Estate Recovery rules provide that real property which passes directly to heirs outside of probate is not subject to being attached in a Medicaid Estate Recovery proceeding. An elder law attorney can utilize this rule by retitling the real property containing the senior’s primary residence as “joint with the right of survivorship”, or JTWROS. A small percentage of the real property (frequently 1%) is sold to a beneficiary, such as a child (with the largest percentage ownership of the real property, frequently 99%, retained by the senior) so that the real property will now be owned jointly by tenants-in-common. Real property owned by tenants-in-common is not a countable asset when qualifying for Medicaid.
To keep the now jointly-owned primary residence out of the senior’s probate estate following his death, the “right of survivorship” is added to the deed. Now, just like a jointly owned bank account with survivorship rights, the senior’s ownership percentage (99% for example) automatically transfers to the minority (1% for example) beneficiary (frequently the senior’s child/children) at his death, so that the beneficiaries now own 100%. This becomes an out-of-probate transfer directly to the senior’s beneficiaries, which currently escapes Medicaid Estate Recovery under North Carolina’s Medicaid rules. The home passes to the senior’s beneficiary(ies) without Medicaid being able to use it to repay Medicaid costs.
Another positive result is that the senior’s heirs will not have to pay taxes on any appreciation of the home during the senior’s life. Because the home will be includable in the senior’s gross estate for federal estate tax purposes, the tax basis will be reset to the market value of the property at the senior’s death, thereby potentially saving the senior’s heirs thousands of dollars in capital gains taxes.
The JTWROS procedure may not work properly if a mortgage remains on the senior’s home. If it does, the sale of a minority percentage of the property to the senior’s beneficiary(ies) may trigger the bank loan’s “due on sale” clause, making the balance of the loan immediately due. For this reason, any bank loan attached to the senior’s primary residence typically must be paid off before the elder law attorney can set up a JTWROS conveyance.
Because family relationships can be more complex than what can be captured on a JTWROS deed, in addition to the JTWROS deed, the elder lawyer may create a real estate contract to be signed by the involved family members to better clarify the results of the JTWROS transfer.
Other Real Property
The JTWROS procedure may also be used to protect other tracts of real property owned by the senior from Medicaid Estate Recovery. In addition, because other real property may be a countable asset(s) when trying to qualify for Medicaid, converting such real property from single ownership to joint tenants-in-common ownership prior to applying for Medicaid can convert the property to a non-countable asset for Medicaid qualification purposes.
Even though the JTWROS deeding procedure works now in North Carolina to keep real property away from Medicaid Estate Recovery, the Medicaid rules could be changed in the future to prevent the technique from working.
GIFT TRANSFER OF THE HOME TO HEIRS WHILE RETAINING A LIFE ESTATE
The JTWROS procedure currently works to prevent Medicaid Estate Recovery, but it does not work in North Carolina to protect the senior’s home from other types of creditors during probate.
Even if a JTWROS property has passed to heirs directly outside of probate, North Carolina probate rules will allow the real property to be pulled back into the probate proceeding to be used to pay the estate debt to such non-Medicaid creditors as hospitals and county tax assessors, particularly if there are no other estate assets left to pay off such claims.
To shield the senior’s home from all estate creditors, the senior may gift the remainder interest in his home away to his beneficiaries during life, while retaining a life estate so that he may legally remain in his home during his lifetime. This assures that no future creditors, including medical creditors such as Medicaid, will be able to place a lien on his home following the conveyance, because the home will now not be available to pull back into the senior’s probate estate to pay debts following the senior’s death.
In addition to allowing the senior to continue to use his home during his lifetime, retaining the life estate allows the senior to include the home in his gross estate for federal estate tax purposes under Internal Revenue Code Section 2036. His heirs will then receive a step up in (tax) basis, re-setting the tax basis of the property to its market value at the time of the senior’s death. Because the senior’s heirs will not have to pay capital gains taxes on the senior’s home appreciation during the senior’s lifetime, this can save the family thousands in capital gains taxes.
If the senior transfers his home to his heirs without including a life estate for himself, his heirs will have to pay capital gains taxes on all home appreciation from the time that the senior originally purchased the property forward.
The gift transfer while retaining a life estate technique is not appropriate for seniors who may need Medicaid within 5 years. If the senior attempts to qualify for Medicaid within five years of this transfer, Medicaid will require the senior to private pay (for example to a nursing home or managed care facility) the entire value of the house before Medicaid will provide any government dollars.
In some cases, the family may be able to give the house back to the senior to avoid this Medicaid problem, but family dynamics may make this an unsure result.
DO NOT WAIT TOO LONG TO CONVEY PROPERTY
The family should not wait too long to shield the senior’s home against creditors, including medical creditors. Under North Carolina law, such procedures such as the JTWROS transfer and the home gift transfer with the retention of a life estate work to protect against future creditors, but may not work to protect against current debts or creditors.
In addition, seniors could encounter sudden illness at any time which could make them mentally incompetent, and unable to sign the legal documents needed to protect their home from creditors.
It may frequently make good sense to use a JTWROS deed as insurance to shield a senior’s home from Medicaid Estate Recovery. Because a senior’s Medicaid bill can be so large, the JTWROS deed could help the family keep from losing the home to creditors in probate. Because the senior retains as much as 99% ownership in his home as part of a JTWROS conveyance, the senior retains control of his home and can use it like he always did. Thus, the JTWROS deed is a “low impact” asset preservation technique.
To guard against all future estate creditors, the senior may gift away the remainder interest in his home, and retain a life estate. This can work well when done early, but should not be done if the the senior will need Medicaid in less than five years.