As people age, many worry about the cost of long-term care and how those costs can erode the assets they could otherwise leave to their loved ones. The prospect of paying for nursing home care can be daunting. Medicaid plays a significant role in assisting Massachusetts residents who cannot afford the high costs of such care on their own. These costs, however, can result in a lien on your home, reducing what could otherwise pass to your loved ones. While these liens can skyrocket into hundreds of thousands of dollars, your home isn’t defenseless. Armed with foresight and strategic planning, you can help protect your precious assets and ensure more of your legacy reaches your loved ones.
Understanding Medicaid in Massachusetts
Medicaid is a joint federal and state program that provides healthcare coverage for people with limited resources. Each state must operate a system that fits within federal guidelines to receive federal reimbursement for a portion of the state’s cost. In Massachusetts, the program is called MassHealth. MassHealth is administered by the Office of Medicaid (OM). MassHealth covers the cost of long-term care in a nursing home facility for those who meet certain income and asset requirements. When a person who has received MassHealth benefits dies, the program has the right to recover the cost of care from their estate.
A lien is a legal claim against real estate that serves as security for a debt. The OM records the lien at your local Registry of Deeds. This means that when the real estate is sold, the lien must be paid off before anyone can receive any proceeds. Because it is filed in the public record, it will be disclosed to prospective buyers automatically when they conduct a title search.
Placing the Medicaid Lien on Real Estate
To achieve estate recovery, the OM places liens on real estate owned by Medicaid recipients unless certain relatives live there. These liens are known as “notice” liens, and the OM has no claim against the property while the recipient is alive. Typically, the lien only applies to the probate estate. This means that if the home passes outside of probate, the lien may not apply.
The OM can place a lien on a Medicaid recipient’s property if the recipient is not expected to return home. The Medicaid application asks if the applicant intends to return home. This may be a subjective question. If the applicant intends to return home, and checks “yes,” the OM will require a doctor’s certification that they have a reasonable expectation of returning home. If so, then they will not file the lien. However, if the applicant checks “no,” indicating they don’t plan to return home, the OM will automatically place a lien without a doctor’s certification.
The Problem With Revocable Living Trusts
Many people place their homes into a Revocable Living Trust (or “RLT”) to avoid probate, streamline incapacity issues, and minimize potential estate taxes. An RLT offers no protection against a nursing home line. Moreover, deeding real estate to an RLT will result in the OM considering the home a “countable asset” if the owner applies for Medicaid. This will ultimately result in being denied Medicaid benefits. The OM argues that the house loses its nonexempt status because the trustee or beneficiary can change the trust’s terms without the OM’s knowledge, allowing the house to avoid probate and estate recovery. A trustee can cure this problem by deeding the property back to the owners in their individual names so they can qualify.
Strategies to Protect Your Home
Several options are explained below that can be implemented as part of your estate plan to protect your home against a nursing home lien.
Transfer Ownership of the Home to a Spouse
Transfers are allowed between spouses without penalty and do not disqualify one from receiving benefits. Removing a spouse’s name from a deed and placing it solely in the other spouse’s name won’t affect Medicaid eligibility. Further, the OM cannot place a lien on the house as the person who received benefits no longer owns it. The house remains protected so long as the spouse leaves the house to someone other than the spouse who received Medicaid benefits (in case the non-institutionalized spouse predeceases). This is a short-term solution, however, as the house will not remain protected if the surviving spouse requires Medicaid benefits. Advanced planning using an Irrevocable Trust, Life Estate, or combination of both may be advisable.
Life Estate Deeds
A life estate deed can effectively protect your home. With this type of deed, the homeowner can live at the property for the rest of their lives (the lifetime interest). In the deed, the remainder interest is typically left to the owner’s children or an Irrevocable Trust. This arrangement allows the at-home owners to remain home and maintain control of the property during their lifetime. Further, it ensures that the property passes to their heirs outside of the Medicaid recipient’s probate estate when they pass away, thus avoiding a potential lien.
One of the primary benefits of a life estate is that it generally provides complete protection from estate recovery by the OM. When the last life tenant passes away, the remainder beneficiaries automatically own 100% of the property, bypassing probate and avoiding any potential Medicaid liens. Additionally, the property owner retains most of the control over the house during their lifetime, making it a highly flexible option (compare this to the irrevocable trust option below).
It’s important to note that, like irrevocable trusts, creating a life estate will trigger a look-back period during which the owner will be disqualified from receiving Medicaid benefits (for up to five years). Therefore, it’s crucial to consider whether you have sufficient funds to pay for nursing home costs privately during this period. Planning well in advance is always the best option. In the event of a disqualification, having the remainder beneficiaries deed back their interest to the life tenant can effect a cure.
In addition, a Life Estate Deed should contain a special Limited Power of Appointment (LPA) to maximize the control over the remainder beneficiaries and minimize the likelihood of possible tax issues. The LPA allows the ultimate beneficiaries to be changed and prevents a completed gift from occurring for tax purposes. So, suppose one beneficiary had a creditor, or there was a falling out. In that case, you can reserve the right to divert the property to someone else.
The Drawbacks of Life Estate Deeds
There are a couple of downsides to the life estate deed. The first is that whoever the remainder interest is left to, the property will be subject to their creditors. If the remainder persons are sued or go through a divorce, a creditor could go after the property. Additionally, unlike an Income Only Irrevocable Trust, the proceeds are exposed for Medicaid purposes if the property is sold. In contrast, if the property were in an Irrevocable Income Only Trust, the proceeds would be held in a bank account for the trust and not under the owner’s name. They would remain protected and, unlike the sale in the context of a life estate, the look-back period would not restart.
Medicaid Income Only Irrevocable Trust (“IIOT”)
A second option is to use an Income Only Irrevocable Trust to protect the real estate. The IIOT must be irrevocable, and the person creating the trust, the “Grantor,” must not be a trustee or have access to the trust principal. This means that once the trust is created, the Grantor cannot change the terms of the trust or access the assets that are placed in the trust. They can only receive income from those assets. For non-incoming producing real estate, the income interest is the same as a life estate. It is the Grantor’s right to live in the home for life. The home will no longer be in the individual’s name. Accordingly, it is not considered a countable asset for Medicaid eligibility purposes.
Using an irrevocable trust has several benefits. It allows the individual to protect the home and distribute it to their beneficiaries without going through probate. Additionally, because the trust owns the home, it should remain protected from a Medicaid lien. The OM frequently challenges IIOTs, but in recent years, a well-developed body of case law has arisen to establish their validity. The property also receives favorable capital gains treatment.
The Downsides of Irrevocable Trusts
Now for some of the downsides. You don’t have the exact same level of control you once had. However, by and large, your day-to-day life will not change. The trustee of the trust will typically be a trustworthy child. If they did not act appropriately, you can remove them and have someone else appointed.
In addition, you cannot deed your property into an IIOT if you have a mortgage on your property. A lender will not allow it. Moreover, if you receive a real estate tax exemption from your city or town, you could lose that exemption using an IIOT. For both of the above issues, however, a potential option is to use a life estate deed, with the remainder to the IIOT (not directly to your children, for example). This may be sufficient to satisfy your mortgage lender and the local tax collector while safeguarding the property from potential creditors of the person who otherwise would hold the remainder interest as discussed above.
Purchase Long-Term Care Insurance
Finally, long-term care insurance is one of the best ways to protect yourself. Long-term care insurance is a type of insurance policy that covers the costs associated with long-term care, such as nursing home care, assisted living, and home health care. This insurance can cover expenses that aren’t covered by other types of insurance, such as Medicare or private health insurance.
This can help prevent the need to rely on Medicaid to cover these costs, which can help protect your home and other assets from estate recovery. Of course, not everyone can afford long-term care. Therefore, the above-referenced alternatives may be the best course of action.
Protecting your home from a Medicaid lien in Massachusetts can be a complicated process. There are several options to consider, including transferring ownership of the home, creating a life estate deed, using an income only irrevocable trust, and purchasing long-term care insurance. Remember, planning ahead is key to protecting your assets. It is best to start thinking about long-term care and Medicaid planning well before you need it.
Each of these strategies has its own benefits and drawbacks, so it is important to work with an attorney who can help you make the best decision for your situation. Contact our Estate Planning Attorneys today if we can help.