Protect Your Home from North Carolina Medicaid Estate Recovery
Federal and North Carolina law require that Medicaid pursue “estate recovery” after a Medicaid recipient dies. With some exceptions, North Carolina Medicaid must make a claim against the decedent’s estate for the amount of benefits Medicaid paid for the recipient’s care during the recipient’s lifetime. As a practical matter, this will only apply when (a) there is no surviving spouse or disabled child (of any any age), and (b) when the Medicaid recipient still owned a house when he or she died. That’s because the home is nearly the only asset that it is possible to keep, while qualifying for and receiving Medicaid. While the home is considered an “exempt” asset for purposes of Medicaid eligibility, it definitely is not “protected” from being lost to the state. As a result, when a Medicaid recipient dies, the state of North Carolina files a claim against the estate and demands to be repaid. Repayment means the state may require the sale of the family home.
There are ways of protecting your home, discussed generally below.
Life Estates in North Carolina
Setting up a “life estate” can protect a home from estate recovery. However, proceed in this area with caution, and only after getting advice from a qualified and experienced elder law attorney. There are traps for the unwary in life estates, and many people don’t find about them until it’s too late.
A life estate is a form of co-ownership of real property between two or more people. They each are an owner of the property, but for different periods of time. The person owning the life estate has the current right to the property for the rest of his or her life. The other owner has a current ownership interest but has no right to control the real estate until the life estate owner dies causing the end of the life estate. The owner of the life estate is often called a “life tenant” while the other owner is called the “remainderman” because he or she owns the “remainder” of the property.
Example: Sally gives a remainder interest in her house to her children, John and Peggy, while retaining a life interest for herself. Sally does this by signing a deed with life estate language. As a result Sally, the life tenant, has the right to live in the property, or rent it out and to collect rents for herself. She also is responsible for maintaining the property paying property taxes. Any sale of the property to a third party (to someone other than Sally, John or Peggy), would require the signature of all 3 people. As a result, even if John and Peggy seek to sell the home, Sally would still have the right to live there because any conveyance by John and Peggy alone would not affect Sally’s life estate rights, unless Sally also agrees.
When Sally dies, the house will pass directly to John and Peggy as remaindermen and it will not go through probate. Because the property is not part of Sally’s probate estate, it is exempt from North Carolina estate recovery. Another benefit of the life estate is that for tax purposes, the property will get a “stepped up basis” at Sally’s death. That can meana significant reduction in capital gains taxes payable when Robert and Mary sell the property after Sally dies.
Life estates are created simply by executing a deed conveying the remainder interest to another while retaining a life interest, as Jane did in this example. After the house passes to Robert and Mary, it avoids estate recover by North Carolina.
As with a transfer to a trust (described below), the deed creating a life estate typically results in a Medicaid penalty look back period of five years.
Sometimes, particularly in crisis situations when a single person is in the nursing home and needs Medicaid, variations of the life estate deed are used. This might include a joint tenancy deed, or a deed with an enhanced life estate. However, any time you add another person onto the deed, you open yourself up to problems that could be worse than Medicaid. There are tax problems if the home is sold during your lifetime, In addition, you could have additional unexpected problems if the person who is the co-owner on your home gets sued or has large debts, or goes through a divorce, or dies.
Only use life estate deeds after consultation with an experienced elder law attorney who specializes in asset preservation and Medicaid planning.
Trusts in North Carolina
Trust often are a preferred way of protecting the home from estate recovery, using an irrevocable trust. Trusts are more flexible and protective than life estates, but they require drafting of a comprehensive trust agreement with the right provisions. Deciding which would be better, a life estate deed or an irrevocable protector trust, requires careful consideration.
Often the trust will be structured as a Medicaid Asset Preservation Trust or MAPT. The parent (or parents) is the Grantor and the initial Trustee of the trust. The parent(s) are completely in control over what happens to the house while its in trust. If the house is sold by the parents as Trustees, the sales proceeds must go back to the trust, not to the parents. The parents will then be able to receive income from the trust based on interest and dividends in the trust. However, the principal must stay in the trust, unless the Trustee decides to distribute it to a permitted beneficiary (generally to one or more of the children).
If properly drafted, the MAPT avoids problems that can happen with life estate deeds. For example, if the parents decide to sell the home, the trust can be structured to allow the parents to utilize their Section 121 personal residence exclusion. That means that the house can be sold and no tax has to be paid on the first $250,000 of capital gain for a married couple. Similarly, if a nursing home resident has their home in trust and the family decides to sell the home instead of continuing to pay taxes and insurance and maintenance, the sale will not jeopardize the resident’s Medicaid status. That’s because all of the proceeds will be returned directly to the MAPT; none of the sales proceeds will have to be spent down on the resident’s cost of care.
Contrast that with what happens if a life state deed with the children was used, and the family decides to sell the house now that dad has died and mom is in the nursing home. First, the children will pay taxes that the trust would not have paid, because the children can’t claim a residence exemption. The house was not their residence so they will pay thousands of dollars of tax that could have been avoided. Secondly, because mom is still a co-owner on the house (she owns the life estate), part of the sale proceeds will go to her. That means she will be ineligible for Medicaid until the sale proceeds are spent down to $2,000. She will be off Medicaid, and paying $6,000 per month or more for nursing home care out-of-pocket. Again, that could have been avoided through proper trust planning.
Once the house is deeded to the irrevocable trust, it cannot be taken out again by the grantor (the person who created the trust). Although the trust could sell the house can be sold, the proceeds must remain in the trust. This can protect more of the value of the house if it is sold. Further, if properly drafted, the later sale of the home while in this trust might allow the settlor, if he or she had met the residency requirements, to exclude up to $250,000 in taxable gain, an exclusion that would not be available if the owner had transferred the home outside of trust to a non-resident child or other third party before sale.
You should contact your attorney to find out what method will work best for you. If your attorney is a general practitioner, you might ask whether they would recommend that you talk with an experienced elder law attorney who specializes in this type of Medicaid planning.