Ask an advisor: How can I stop Medicaid from seizing my home?

April 30, 2024 5:07 PM

Medicaid estate recovery is the practice by which the program seizes assets, including homes, to pay for long-term care after a beneficiary has died.

Welcome back to "Ask an Advisor," the advice column where real financial professionals answer questions from real people. The topic can be anything in the world of finance, from retirement to taxes to wealth management — or even advice on advising.

In retirement, there are many worst-case scenarios to worry about: not saving enough, spending your savings too fast, losing your portfolio in a stock market crash. Less well known is another nightmare: having your home seized by Medicaid.

It's a real possibility. Under a law passed in 1993, state Medicaid programs not only can — but must — recover long-term care expenses from retirees' estates after they die. In some cases, that can mean putting a lien on the family home.

"State Medicaid programs must recover certain Medicaid benefits paid on behalf of a Medicaid enrollee," Medicaid says on its website. "States may impose liens for Medicaid benefits incorrectly paid pursuant to a court judgment."

The rationale is that a senior should not qualify for Medicaid unless they have very little wealth (most states set the limit at $2,000). As long as the beneficiary is still alive, homes are exempt from this calculation. But after they die, it's a different story — and their children are often the ones who pay the price.

This practice, known as Medicaid estate recovery, has not gone unnoticed by U.S. lawmakers. Rep. Jan Schakowsky of Illinois has introduced a bill to ban these seizures, called the "Stop Unfair Medicaid Recoveries Act." By her staff's estimate, 17,000 families in Illinois have lost their homes to Medicaid.

"Medicaid is the only public benefit program that requires states to seek repayment for long-term care services," Schakowsky said in a statement. "In many cases, Medicaid estate recovery keeps families in poverty and forces seniors and disabled individuals to forego care."

All of this is a concern not only for retirement but also for estate planning. If the home in question is an important part of a retiree's legacy, how can they make sure their children's inheritance isn't seized by the government?

This is exactly the question that a stressed-out homeowner in New York is pondering. For help, she turned to the experts. Here's what she wrote:

Dear advisors,

My husband and I are in our early 60s, and we plan to retire in five to seven years. We have no long-term health insurance, and I'm worried about how this might affect the inheritance we leave for our kids.

My concern is this: If we do end up needing long-term care and the costs are overwhelming, we fear that we'd be forced to sell our apartment — or even that Medicaid or the care provider might seize it. That apartment, which is worth about $1.3 million, is the main asset we plan to leave to our two daughters. To protect their inheritance, would it make sense to put the apartment in trust? Or is there a better way?

Sincerely,

Muddled in Morningside Heights

And here's what financial advisors wrote back:

Get insurance

Jay Zigmont, certified financial planner and founder of

Childfree Wealth

in Mount Juliet, Tennessee

You need to have a plan for long-term care. Putting your apartment in trust may protect it from being taken by Medicaid, but that means your plan is to have Medicaid care. The problem is that Medicaid care is not always the best, and you may want other options. You can look at getting a long-term care insurance policy, either as a stand-alone or a life insurance or hybrid policy. With a hybrid policy you can get long-term care coverage, but if you don't use it, the policy has a death benefit. While these policies are not cheap, it effectively gives you protection both for long-term care and inheritance.

Lawyer up

William Nedza, CFP and founder of

Ventoux Financial Advisors

in Chicago

Protecting any assets from being used for the costs of long-term care is a topic best handled by an experienced estate planning attorney, and an advisor needs to be careful not to give legal advice. That being said, while there are indeed certain estate planning instruments that may be able to protect an asset from being "seized" by care providers, or Medicaid, the asset owner may lose control over the asset. Each state may also have different laws on this topic, so it's important to know your state's law. There could be a better way to protect an asset from being depleted by the cost of long-term care, but a more detailed view of the client's overall situation is required. Perhaps long-term care insurance would be an option. The best advice is to hire a CFP to help with all the questions this situation presents.

Money isn't everything

Noah Damsky, chartered financial analyst and principal at

Marina Wealth Advisors

in Los Angeles

It could make sense to get the apartment out of your names and into your children's, for example through an irrevocable trust or a gift. However, one of the biggest downsides is that you would lose a step-up in basis at death, which could equate to more money than the cost of care. This could result in qualifying for Medicaid while maximizing the inheritance to your daughters, but there are other considerations such as the difference in quality of care at a Medicaid facility versus other options.

In the end, your care under Medicaid may not come close to the quality you can afford with a $1.3 million apartment. You could use the home for financing if you don't have the cash, such as with a mortgage, HELOC or home equity investment. Money can be everything, but not squeezing every last penny.

If your quality of life is much better with paid care, maybe a $1 million inheritance rather than a $1.3 million inheritance in combination with high quality care will make you and your daughters happier.

It's important to speak with a qualified attorney and team of advisors since there are many moving parts, including financial, tax and legal considerations.

Tread carefully

Michael Carbone, CFP at

Eppolito Financial Strategies

in Chelmsford, Massachusetts

This is a good question. Trusts can be effective tools for protecting an asset from the risk of needing custodial care, but there are almost always drawbacks to doing so. For example, if the kids were to inherit the home directly from the parents, they would receive a "step-up" in cost basis, whereas if they created an irrevocable trust, they'd be giving the money to the trust, effectively getting it out of their names.

On one hand, if the house is owned by an irrevocable trust for five years, it would likely be protected from long-term care risks, but it would also likely result in the gain (as measured by the change of the home's value from when the trust was created until the inheritance) being taxable as a capital gain to the kids. So it would be important to weigh the potential benefits vs. potential opportunity costs of missed tax savings.

It's also important to recognize that giving money to an irrevocable trust is not something that can be reversed. The home would be owned by the trust. Estate planning is extremely complicated and unique to each situation. For example, each state has its own way of treating primary residences should a spouse need to go on Medicaid — so it's incredibly important they speak with a local attorney who specializes in elder law to ensure they're not going overboard with the trust. There could be other avenues they can take. Hope this helps!