Dad and Aunt Living Together and Dad Needs Medicaid – Now What? (Part 2)

Last week we were discussing George’s dilemma.  Dad needs nursing home care but owns the home that he and Aunt Harriet are living in.  Is there a way for him to preserve the house for Harriet but avoid a New Jersey Medicaid lien and New Jersey Inheritance tax?  The answer is “yes”.

A home can be transferred without resulting in a Medicaid penalty in certain rare cases.  One such exception is in the case where a sibling has an equity interest in the home and has been residing there for at least one year before the date that the other sibling entered the nursing home.  George’s ears perked up.  “It sounds like our situation”, he said.  “But, what does ‘equity interest’ mean?  Harriet transferred the entire interest to Dad”, he replied.

I explained that the definition of equity interest is broader than simply ownership on the deed.  If Harriet has been living in the house, making it her home, she has an equity interest in it.  That would qualify for the exception.  Transferring the house to her could protect it from any New Jersey Medicaid lien and would avoid the inheritance tax she would have to pay if she, instead, receives it when George’s dad dies.  Should Harriet need nursing home care she could sell the home and spend down the proceeds until she reached Medicaid eligibility.  If she died without ever needing nursing home care, under her will, the house would pass to George, subject to New Jersey inheritance tax.  It all sounded good to George.

I then told him of a second possibility.  If Dad still had legal capacity to sign a will (George told me he did), he could leave the home to George and not transfer title to Harriet.  If Dad dies before Harriet, there would be no inheritance tax to pay because George, as Dad’s child, is not subject to New Jersey Inheritance tax.  There would, however, be an estate recovery lien to be repaid to New Jersey.

If Harriet then needed nursing home care, George could sell the house and use the proceeds as necessary to pay for Harriet’s care but could qualify her for Medicaid without spending the entire proceeds because they would not be Harriet’s funds and thus not subject to Medicaid rules.   I told George we would need to explain this all to Harriet and to Dad.

George though about it for a minute.  He wasn’t exactly comfortable with the second option but said he would discuss it with Dad and Harriet first.  Harriet had no other family so George knew he would need to take care of her just as he was doing for Dad.  All he wanted to accomplish when he called me was to insure that Harriet would have the house or its proceeds to meet her need.  He wasn’t thinking there would be anything left when both passed away.   But ultimately, he said, it would be up to Dad and Harriet to decide what they want to do.