I. MassHealth Eligibility and the Family Home
A. Long-Term Care Planning
For all practical purposes, in the United States, the only “insurance” plan for long-term institutional care is Medicaid (called “MassHealth” in Massachusetts). Medicare only pays for approximately 20% of nursing home care in the United States. Private insurance pays for even less. The result is that most people pay out of their own pockets for long-term care until they become eligible for MassHealth. While Medicare is an entitlement program, MassHealth is a form of welfare—or at least, that’s how it began. So to be eligible, you must become “impoverished” under the program’s guidelines.Despite the costs, there are advantages to paying privately for nursing home care. The foremost is that it will make it easier to gain entrance to a better-quality facility. The obvious disadvantage is the expense. In Massachusetts, nursing home fees can be as high as $12,000 a month. Without proper planning, nursing home residents can lose the bulk of their savings. For most of our clients, the primary objective of long-term care planning is to protect savings for their spouses, their families, and themselves by qualifying for nursing home MassHealth benefits. This can be done within the following rules of MassHealth eligibility.
In order to qualify for federal reimbursement, the state MassHealth program must comply with applicable federal statutes and regulations. So the following explanation includes both Massachusetts and federal law as applicable.
B. MassHealth Asset Rules
The basic rule of nursing home MassHealth eligibility is that an applicant, whether single or married, may have no more than $2,000 (higher in some states) in “countable” assets in his or her name. “Countable” assets generally include all belongings except for (1) personal possessions, such as clothing, furniture, and jewelry, (2) the applicant’s principal residence up to $828,000 in equity (in 2016), and (3) assets that are considered inaccessible for one reason or another.
One vehicle per household is uncountable regardless of its value, provided it is for the use of the eligible individual or a couple or a member of the eligible individual’s or couple’s household. Any additional vehicles are fully countable.
C. The Home
The home is not considered a countable asset if its equity value is under $828,000 (in Massachusetts), or a spouse or disabled child is living in the property. In those instances, it is not counted against the asset limits for MassHealth eligibility purposes as long as the nursing home resident intends to return home. It does not matter if it is unlikely that the nursing home resident will ever be able to return home; the intent to return home by itself preserves the property’s character as the person’s principal place of residence and thus as a non-countable resource. As a result, for all practical purposes, most nursing home residents do not have to sell their homes in order to qualify for MassHealth.
D. The Transfer Penalty
The other major rule of MassHealth eligibility is the penalty for transferring assets. If an applicant (or his or her spouse) transfers assets, he or she will be ineligible for MassHealth for up to five years, no matter the size of the gift. The exact period of ineligibility depends on the amount transferred. The ineligibility period is calculated by dividing the value of the asset transferred by the monthly cost of nursing home care, which in Massachusetts is deemed to be $9,400. For example, if a MassHealth applicant transfers $55,000 before applying for MassHealth and within the five-year penalty period, he will be deemed ineligible for six months ($55,000/$9,400 = 5.85).
The period of ineligibility doesn’t begin, however, until the applicant would otherwise be eligible for benefits but for the transfer. In other words, he has to have spent down his assets to $2,000. Here’s an example of how this works:
June 1, 2016 Senior gives $55,000 to his son
February 1, 2016 Senior moves to nursing home
August 1, 2017 Senior has spent down countable assets to $2,000
Penalty period begins
February 1, 2018 Senior is eligible for MassHealth coverage
E. Exceptions to the Transfer Penalty
Transferring assets to certain recipients will not trigger a period of MassHealth ineligibility. These exempt recipients include:
(1) A spouse;
(2) A blind or disabled child;
(3) A trust for the benefit of a blind or disabled child; or
(4) A trust for the benefit of a disabled individual under age 65 (even for the benefit of the applicant under certain circumstances).
Special rules apply with respect to the transfer of a home. In addition to being able to make the transfers without penalty to one’s spouse or blind or disabled child, or into trust for other disabled beneficiaries, the applicant may freely transfer his or her home to:
(1) A child under age 21;
(2) A sibling who has lived in the home during the year preceding the applicant’s institutionalization and who already holds an equity interest in the home; or
(3) A “caretaker child”, who is defined as a child of the applicant who lived in the house for at least two years prior to the applicant’s institutionalization and who, during that period provided such care that the applicant did not need to move to a nursing home.
A transfer can be “cured” by the return of the transferred asset either partially or in its entirety, in which case, the penalty period will be shortened or entirely eliminated.
F. Liens and Estate Recovery
MassHealth has two methods of recovering their costs from homes owned by MassHealth beneficiaries. The first is to place a lien on the home payable when and if it is sold. This lien disappears upon the death of the beneficiary. However, MassHealth has another arrow in its quiver – estate recovery.
MassHealth has the right to recover whatever benefits it paid for the care of the MassHealth recipient from his or her probate estate. Some states have extended this power to non-probate property with mixed success.
Given the rules for MassHealth eligibility, the only property of substantial value that a MassHealth recipient is likely to own at death is his or her home. Since the state may make a claim against the decedent’s home only if it is in his or her probate estate, property that is jointly owned, in a life estate, or in a trust is not included in the probate estate and thus escapes estate recovery.
There is a waiver or a postponement of MassHealth’s estate recovery claim under certain circumstances. First, the claim may only be made for nursing home benefits paid and for community benefits paid after age 55. So, the estates of MassHealth beneficiaries who die before age 55 and were never institutionalized are not subject to a claim for reimbursement.
Second, the claim is deferred if the deceased beneficiary had a surviving spouse, a child under age 21, or a blind or disabled child. None of these individuals need to be living in the house. Presumably, at the death of the spouse or blind or disabled child and when the under age child reaches age 21, MassHealth will assert its claim. It’s not clear how MassHealth protects its claim in the meantime.
Finally, MassHealth law and regulations provide for a hardship waiver if at least one beneficiary of the estate has been living in the house for at least a year before the beneficiary’s death, continues to live there, and has income under 133% of the federal poverty level. The waiver is conditional for two years and becomes permanent if all the conditions continue to exist after that time period has passed.
II. Planning Options for Protecting the Home
A. Issues to Consider
Should a client need MassHealth coverage of in-home or nursing home care, the house is at risk under a number of circumstances. First, if it is sold, it is transformed from a non-countable, protected asset to cash which is countable and must be spent down (especially in the case of a single individual) before the owner can be eligible for benefits.
Second, if the owner has already received MassHealth benefits, those benefits must be reimbursed from the sale price. Finally, if the house is in the beneficiary’s estate, it will be subject to recovery upon his or her death.
These risks can be protected against by transferring the house to the intended ultimate beneficiary, usually the next generation. Then it won’t be in the future nursing home resident’s estate and will not be subject to recovery. But doing so includes the following potential problems:
* Unless the recipient is disabled or falls under another exception, doing so will cause five years of ineligibility for the transferor.
* It could cause significantly greater taxes on capital gains than would be the case if the recipient had inherited the property.
* The house will be under the control of the children, rather than the parent, which can have adverse results if they disagree or if the children run into financial or marital difficulties.
* The equity in the house will no longer be available to the parents if needed for living or care costs.
Two typical mechanisms many clients take to protect their homes from MassHealth estate recovery while avoiding many of these risks are placing the house in either a life estate or an irrevocable trust. Both have their benefits and drawbacks and the client, in each case, must decide whether the potential gain merits the costs.
B. Life Estates
A life estate is typically created by a deed from the current owner or owners of property to one or more recipients, under which the grantor or grantors retain the right to live in the property and to collect rents for the rest of their lives. When the life tenant (or tenants) passes away, the property passes automatically to the so-called “remainderman” or “remaindermen.” This is a relatively easy transfer to effect.
Typically, when a house in a life estate is sold, the proceeds are divided between the life tenants and the remaindermen based on the actuarial life expectancy of the life tenants. The life tenant then has funds that are unprotected for MassHealth purposes. Often family members of nursing home residents who own life estates are put in the awkward position of having to keep and maintain a home after the parents have moved to a nursing home in order to avoid having to spend down a portion of the proceeds if it is sold.
In addition, capital gains are allocated along with the proceeds. While the life tenant may be able to exclude the first $250,000 of gain if the house was her residence ($500,000 if she’s married), this is not true of the remaindermen, who will have to pay taxes on any gain attributable to their shares.
We generally include a limited testamentary power of appointment in our life estate deeds for a number of reasons. First, it gives the parents some control since they can change the ultimate beneficiaries of the property. Second, it means that the deed is not a completed gift and no gift tax return need be filed. Third, it provides those who inherit a step-up in basis. Fourth, some argue that doing so makes the life tenant the owner for tax purposes permitting her to claim the entire capital gain and use her IRC Sec. 121 exclusion against all of the gain.
The main advantage of a life estate over an irrevocable trust is that it’s is reversible. For clients of questionable health or limited other assets, it may be too risky to lock in a five-year penalty for transferring the property. Since a life estate can be reversed simply by the recipients executing a deed back to the original owner or owners, it can be undone if necessary, unlike an irrevocable trust. Also, in some instances the fact that the original owner would receive some of the proceeds of a sale is beneficial.
C. Irrevocable Trusts
As is suggested above, in most instances where clients seek to protect their homes for MassHealth planning purposes, they choose to use an irrevocable trust over a life estate for these reasons:
* The most important reason is that irrevocable trusts permit the sale of the house and the protection of all of the proceeds.
* Trusts also permit more fine-tuned planning. For instance, they can account for what happens when a child dies before a parent. This has been a significant problem with life estates in some instances.
* Trusts can hold and shelter other assets, such as savings and investments.
* Trusts can permit income to be paid to the grantor, but not the principal. They can, however, permit principal to be distributed to other beneficiaries. That way, it’s available if they need it (and they can also turn around and use such distributions for the grantors, though they are not legally required to do so).
* Irrevocable trusts are drafted so that the beneficiaries receive a step-up in basis upon the grantor’s death and so that the grantor can claim all of the capital gain if the property is sold during his life. (Proper drafting of trusts for these benefits involves complex tax issues that are beyond the scope of this article.)
As is mentioned above, these benefits mean that more and more clients are using irrevocable trusts to protect their homes.
Typically, irrevocable trusts are drafted with someone other than the grantor serving as trustee. Otherwise, there is some concern that MassHealth will deem the grantor to have too much control and to deem the trust assets available and countable. Usually one or more children are named as trustee. To the extent they have power to make distributions to themselves and to their siblings, this raises a number of tax issues. It is preferable to give this power to an independent trustee.
In recent years, MassHealth has been rejecting trusts that contain provisions it has accepted in the past. This has resulted in extensive litigation with mixed results, with the courts accepting some MassHealth arguments and rejecting others. This means that anyone who has an irrevocable trust designed for MassHealth planning that is more than a few years old needs to have it reviewed. The good news is that trusts are drafted with knowledge of MassHealth’s arguments and can be secure going forward.
III. Reverse Mortgages
Many seniors are cash poor and house rich, having bought and paid off their homes well before the recent recession, but also depleted their savings as living and care expenses have exceeded their income. One solution is to sell their homes. But this can be distressing to people who love their homes and may mean increased living expenses depending on where they move.
Another possibly preferable solution is to borrow against the house’s equity. This can be done through a traditional mortgage or home equity loan, but many people who need to tap into equity do not meet the underwriting requirements. For them, a reverse mortgage can provide the answer. It’s called a “reverse” mortgage because rather than the homeowner paying the bank, the bank pays the homeowner, either a lump sum, a line of credit on which the homeowner may draw, or a lump sum.
Most reverse mortgages are through banks under a federal program that sets strict guidelines for the mortgages and provides insurance to the banks in case they do not get paid in full for one reason or another. But it’s possible for family members to set up private reverse mortgages as well.
Reverse mortgages are rare. According to a 2007 American Housing Survey, for homeowners age 62 or older, 64.5% had no home loan, 21.5% a standard mortgage, 8.5% a home equity loan, 4.8% both a mortgage and home equity loan, and just 0.7% had a reverse mortgage.
B. HECM Reverse Mortgages
Virtually all reverse mortgages come under the umbrella of the Federal Housing Agency’s Home Equity Conversion Mortgage (HECM) program. In order to qualify, the applicant must be at least 62 years old, own the property to be mortgaged, and occupy it as a personal residence. Limits on the amount that may be borrowed are set based on the age of the borrower, the current interest rate, the appraised value of the property, and its location.
The maximum amount that may be borrowed is $625,500. However, most limits are much lower. For instance, a 70-year-old borrower with a house in Westchester County, New York, appraised at $680,000 may borrow up to $329,000. The older the borrower, the higher her credit limit. A 62-year-old with a house valued at $500,000 can borrow up to $296,527, a 70-year-old up to $318,527 and an 85-year old up to $360,527.
The loan may be taken out in regular monthly payments or through a line of credit. Until recently, loans could be taken as lump sums as well, but the FHA dropped this option in 2013 because it ran into higher default rates with these loans.
Reverse mortgages are payable within a year of the borrower’s death or her moving out of the house. This means that borrowers never have to pay back the loan during their lives as long as they continue to live in the house. However, it can present problems for a surviving spouse if the home and the mortgage were in the name of a deceased spouse. Then the mortgage will be due within a year of her death and the surviving spouse will have to come up with the payment or move out and sell the property. This won’t happen if both spouses’ names are on the deed and the mortgage.
Borrowers on reverse mortgages are not guarantors and are not personally liable for payment beyond the value of their property. They also must participate in counseling from independent third parties approved by the FHA before closing on the loan. However, these counseling sessions usually occur after the decision to move ahead on the reverse mortgage has already been made, rather than at the beginning when the homeowner is exploring all of her options.
There are three main problems with reverse mortgages. First, they are expensive. Costs in addition to normal interest charges and closing costs include mortgage insurance and origination fees. Fortunately, mortgage insurance charges have come down to some extent. Where there had always been a 2% up front charge, this has been reduced to 1/100th of a percent with the HECM Saver program. But an annual charge of 1.25 percent of the mortgage balance continues to be charged. In addition, the lender may charge an origination fee of between $2,500 and $6,000 depending on the size of the loan. Where borrowers can qualify for a standard line of credit or second mortgage with a bank, that is often the less expensive option. But reverse mortgages can make sense for borrowers who have no other choice.
The second problem with reverse mortgages is that they are often taken out too soon, since homeowners can qualify beginning at age 62. Lenders advertise these mortgages as opportunities to dig in to the equity in the property to pay for everything from credit card debt to home maintenance to an around the world cruise. Certainly it makes sense to enjoy life while one can, but if the homeowner can’t make ends meet before he takes out the reverse mortgage, what is going to happen when he uses up the borrowed funds? If he doesn’t pay his real estate taxes or homeowners insurance, the mortgage will be in default with interest and principal immediately due. The lender will likely foreclose, and the owner will lose his home, perhaps with decades left to live without much of the equity in his home available for living expenses.
Third, the requirement that reverse mortgages must be paid back within a year of the senior moving out can force the sale of the property when the owner moves to a nursing home. The senior will net whatever proceeds are left after the bank is paid back. If his nursing home costs are being covered by MassHealth, which is generally the case since people with financial resources don’t generally take out reverse mortgages, once the senior receives the sale proceeds he’ll no longer be eligible for benefits because he will have too many liquid assets. He’ll have to spend down the funds he receives paying for his care and go back on MassHealth once the funds are depleted.
In contrast, in most states, nursing home residents may keep their homes indefinitely. So the reverse mortgage forces the sale of a non-countable asset turning it into cash, which is a countable asset. While the home may be subject to claim by the state for reimbursement of its costs upon the beneficiary’s death, such claim will be at the MassHealth rate of payment, which is usually considerably less than the rate nursing homes charge those residents paying privately.
C. Private Reverse Mortgages
Many of the drawbacks of commercial reverse mortgages can be avoided where family members or friends have the resources to make private loans to financially-strapped seniors. They can extend money to the seniors with the understanding that they will be paid back when the house is sold. Even though such loans may be made within families, it is important that they be formalized with a written promissory note and recorded mortgage. Doing so avoids misunderstandings, protects the lender, and helps with MassHealth planning.