The Homestead and Medicaid Planning

By David Goldfarb,
Goldfarb Abrandt Salzman & Kutzin LLP


Table of Contents

I. The Homestead as an Exempt Resource
II. Dealing with the Home as an Illiquid Resource
III. When Is a Homestead an Available Resource: Intent to Return Home
IV. Liens Against the Real Property of an Institutionalized Person
V. Exempt and Non-Exempt Transfers of the Homestead
VI. Recovery from an Estate
VII. Limits on Enforcement of a Lien Against a Homestead
VIII. Life Estates
IX. Use of Trusts
X. Strategies for the Community Spouse


I. The Homestead as an Exempt Resource

For purposes of Medicaid eligibility, a homestead is an exempt resource if it is essential and appropriate to the needs of the household. 18 N.Y.C.R.R. § 360-4.7(a)(1).

For applications for medical assistance filed on or after January 1, 2006, in determining eligibility for nursing facility services and other long term care services, the individual's equity in the homestead will be limited to $750,000. N.Y. Soc. Serv. Law § 366 (2)(a)(1)(ii). The amount will be increased, beginning 2011, based on the percentage increase in the consumer price index. A reverse mortgage or home equity loan may be used to reduce the equity interest in the homestead. The limitation shall be waived in the case of hardship. Furthermore the limitation does not apply if the spouse or the indi-vidual's child who is under the age of twenty-one, or is blind or disabled resides in the home.

The homestead includes the home, land, and integral parts of the property such as garages and outbuildings. It may be a condominium, cooperative apartment, or mobile home, but not a vacation home, summer home, or cabin. 18 N.Y.C.R.R. § 360-1.4(f). All property which is contiguous to the homestead is also considered exempt. 18 N.Y.C.R.R. § 360-4.6(b)(2)(i). The homestead of an SSI related applicant-recipient (a person who is 65 years of age or older, certified blind, or certified disabled) loses its exempt status if the owner moves out of the home without the intent to return, and no spouse, child under 21 years of age, certified blind or certified disabled child, or other dependent relative is living in the home. 18 N.Y.C.R.R. § 360-4.7(a)(1)(ii). If the applicant or recipient is in a nursing home, the homestead remains exempt as long as he or she has a "subjective intent" to return to his home. Anna W. v. Bane, 863 F. Supp. 125 (W.D.N.Y. 1973); 18 N.Y.C.R.R. § 360-1.4(k). See III.When Is a Homestead an Available Resource: Intent to Return Home, below. Otherwise the homestead becomes an illiquid resource. See II. Dealing with the Home as an Illiquid Resource, below.

A Supplemental Needs Trust (SNT) can be used to purchase and own a home for a beneficiary. If the SNT holds title to the house, it is not considered a resource of the beneficiary even if the beneficiary moves out of the house. As an equitable owner of the trust, the beneficiary is considered to be living in her own home for purposes of Medicaid and Supplemental Security Income (SSI). The beneficiary of an SNT does not receive in-kind income if she lives in the home because of her ownership interest and her SSI will not be affected if the beneficiary pays rent to the trust. If the beneficiary lived in the home during the month in which it is purchased (either outright or with a mortgage), SSI will treat the home as in-kind income and the SSI benefit will be reduced by a maximum of one-third, for the month of purchase only. Monthly mortgage payments and expenditures for other shelter or household operating expenses made by the trust are also considered as the receipt of in-kind income to the beneficiary. However, payments for improvements or renovations that improve the value of the home are not considered in-kind income to the beneficiary. Social Security Administration, Program Operations Manual System (POMS), Part 05-Supplemental Security Income, Chapter 011-Resources, Subchapter 20-Identifying Resources, Transmittal No. 34, SSA Pub. No. 68-0501120, August 1999.

II. Dealing with the Home as an Illiquid Resource

Resources which cannot be readily converted to cash (such as real estate) will nevertheless be considered available resources. New York previously allowed eligibility contingent upon liquidating illiquid resources. This was called "conditional eligibility." However, New York has changed its policy on this. 18 N.Y.C.R.R. § 360-2.2(d)(ii)(d). This regulation states that the provisions of 18 N.Y.C.R.R. § 352.23(b)(6), allowing conditional Medicaid eligibility for six months while the institutionalized applicant sells real property, no longer apply.

The issue of a homestead as a resource rarely arises since the institutionalized person usually has a subjective intent to return. However, where there is no intent to return, private pay arrangements with the nursing home will have to be made.

III. When Is a Homestead an Available Resource: Intent to Return Home

A person who owns a home and becomes institutionalized will not be eligible for Medicaid unless he or she has an intent to return home. This intent may be expressed in a letter or affidavit signed by the person, or by written statements of relatives or friends who have personal knowledge of the person's intent to return home. For this purpose, a subjective intent to return home controls, even if there is no reasonable expectation that the person will be discharged and return home.

But note, in contrast to the determination whether the home is an available resource, the controlling factor for the imposition of a lien is whether the person is permanently absent and not reasonably expected to be discharged. If the agency prevails after adequate notice is provided and a hearing (if requested), a lien can be imposed on the home even if there is a subjective intent to return home. See IV. Liens Against the Real Property of an Institutionalized Person, below.

If an institutionalized person is not reasonably expected to return home, the home loses its exempt status. There is a presumption that the Medicaid recipient is in "permanent absence status" and will not return home if she resides in a residential health care facility (i.e., nursing home); enters a skilled intermediate care facility; is transferred from acute care to alternate level of care while awaiting placement in a residential health care facility; or does not have a community spouse and resides in an acute care hospital for more than six calendar months. 18 N.Y.C.R.R. § 360-1.4(k). Although the regulation states only that adequate medical evidence may overcome these presumptions, the court in Anna W. v. Bane, 863 F. Supp. 125 (W.D.N.Y. 1993), held that the regulation was more restrictive than the SSI regulations (which control) regarding the circumstances under which a homestead may be considered an available resource because it did not consider a person's "subjective intent to return home." 20 C.F.R. § 416.1212(c) provides that "if an individual (and spouse, if any) moves out of his or her home without the intent to return, the home becomes a countable resource because it is no longer the individual's principal place of residence." The effect of the court's holding is that the state is enjoined from enforcing the regulation as written, and must consider the subjective intent of a person to return home, regardless of whether the medical evidence indicates that the person is not reasonably expected to return home.

IV. Liens Against the Real Property of an Institutionalized Person

In contrast to the determination whether the home is an available resource, the controlling factor for the imposition of a lien is whether the person is permanently absent and not reasonably expected to be discharged. If the agency prevails after adequate notice is provided and a hearing (if requested), a lien can be imposed on the home even if there is a subjective intent to return home. The local department may not impose a lien on real property unless a person is permanently absent because she resides in a medical institution and is not reasonably expected to be discharged. N.Y. Soc. Serv. Law § 369(2)(a)(ii); 18 N.Y.C.R.R. § 360-7.11(a)(3)(ii). In addition, no lien may be imposed on the home of a person receiving Medicaid extended coverage under the Partnership for Long-Term Care Program, after the person has exhausted the coverage and benefits under an approved long-term care insurance policy. N.Y. Soc. Serv. Law § 367-f .

The local Department of Social Services must provide adequate notice and prove at a hearing that the person cannot reasonably be expected to be discharged from the institution and return home. 42 U.S.C. § 1396p(a)(2) ; 42 C.F.R. § 433.36(d). If the person returns home, the lien dissolves. 18 N.Y.C.R.R. § 360-7.11(a)(3)(i). However, the home may be subject to estate recovery after the person's death. See VI. Recovery from an Estate , below.

A lien is prohibited against the real property of a person who is permanently institutionalized if one of the following lawfully resides in the home:

N.Y. Soc. Serv. Law § 369(2)(a)(ii); 18 N.Y.C.R.R. § 360-7.11(a)(3)(ii).

V. Exempt and Non-Exempt Transfers of the Homestead

No penalty period is imposed on transfers made for full and adequate consideration (e.g., sale of an asset for fair market value, self-canceling installment notes, private annuities). N.Y. Soc. Serv. Law § 366(5)(d)(3). If a home or other asset is sold for less than fair market value, the uncompensated portion of the transfer is used to calculate the penalty period. N.Y. Soc. Serv. Law § 366(5)(d)(4).

The creation of the joint ownership in real property is considered to be a transfer of assets for purposes of Medicaid eligibility and may result in the imposition of a penalty period during which Medicaid will not pay for the cost of nursing home care. New York State Dep't of Social Servs., Transmittal 96 ADM-8, at 19 (Mar. 29, 1996).

Also, the second person's name on the deed will disqualify the older adult from receiving a reduction in real property taxes available to financially eligible persons 65 or older. N.Y. Real Prop. Tax Law § 467. But see Section VIII. Life Estates, below.

Certain transfers of a homestead are exempt from imposition of a Medicaid penalty period of ineligibility for nursing facility services. For this purpose the regulations define a homestead as the primary residence occupied by a medical assistance applicant/recipient and/or members of his/her family. Family members may include the applicant's/recipient's spouse, minor children, certified blind or certified disabled children, and other dependent relatives. The homestead includes the home, land and integral parts such as garages and outbuildings. The homestead may be a condominium, cooperative apartment or mobile home. Vacation homes, summer homes or cabins are not considered to be homesteads. 18 N.Y.C.R.R. § 360-1.4(f).

A person will be eligible for Medicaid including, but not limited to, nursing facility services if the house is transferred to that person's:

N.Y. Soc. Serv. Law § 366(5)(d)(3)(i); 18 N.Y.C.R.R. § 360-4.4(c)(2)(iii)(b).

A sibling's equity interest in the home is broadly construed to include payments for home improvements, mortgage, utilities, and similar expenditures. A child is presumed to be a "caretaker child" if she lived with the parent while the parent suffered from a chronic illness.

Exempt assets may be transferred without penalty because such a transfer would be exclusively for a purpose other than to qualify for Medicaid. This, of course, is not the case with a homestead where there is specific legislation as described above limiting the exempt transfers.

Transfer of assets will now also effect eligibility for SSI. The law provides for transfer exceptions for the home and other resources similar to those in the Medicaid law. 42 U.S.C. §§ 1382a(a)(2)(G), 1382b(c), 1382b(e).

The purpose of Medicaid planning is to preserve assets and establish or maintain eligibility for Medicaid. Courts have consistently held that Medicaid planning is an appropriate goal of a guardian's proposed transfers and does not violate public policy. A guardian may undertake with permission of the Court the exempt transfer of a homestead. The guardian in In re DiCecco,173 Misc. 2d 692, 661 N.Y.S.2d 943 (Sup. Ct. Queens County 1997), was authorized to transfer a home to a son of the incapacitated person, reserving a life estate in the incapacitated person, and to transfer liquid assets to the other children of the incapacitated person, provided sufficient resources were retained to pay for the cost of care during the period of ineligibility.

VI. Recovery from an Estate

For purposes of New York Medicaid estate recovery, an "estate" only includes property passing under a will or by intestacy, and does not extend to assets passing outside a will or intestacy to a joint owner with right of survivorship, or to a designated beneficiary of a bank account, life insurance policy, lifetime trust, or other nonprobate asset. Exempt resources, including the homestead, should be kept out of the recipient's probate estate to avoid a Medicaid estate recovery. Medicaid estate recovery against a recipient is usually only an issue if the recipient had exempt resources such as a homestead. As stated above, if the Medicaid was otherwise correctly paid, estate recovery in New York is limited to property passing under a valid will or by intestacy and does not include property passing by operation of law such as a trust, or property jointly held with right of survivorship.

No adjustment or recovery against an estate (or on a lien) may be made until after the death of a surviving spouse and only when there is no surviving minor, blind, or disabled child. N.Y. Soc. Serv. Law § 366(2)(b)(ii).

There are also provisions for waiver of estate recovery if there is undue hardship. The State Medicaid Manual contains HCFA's interpretation of "undue hardship." State Medicaid Manual § 3810. The State may, but is not required to, give special consideration where the estate is the sole income producing asset of the survivors (such as a family farm or business with limited income), is a homestead of modest value, or there are other compelling circumstances. State Medicaid Manual § 3810(c). In addition, the Manual authorizes states to reject undue hardship claims if estate planning strategies were used to divest assets in order to avoid estate recovery or the hardship claimed is the inability of a beneficiary to maintain a pre-existing lifestyle.

Regulations proposed by the New York Department of Health state that undue hardship may be present where the estate consists of a family farm or business or other compelling circumstances determined on a case by case basis. In re Cox, 687 N.Y.S.2d 594, 595 (Sur. Ct. Cattaraugus County 1999). The Department of Health has indicated that a waiver may be approved if the estate consists of a family home of modest value and that local Medicaid agencies are obligated to consider claims of undue hardship although regulations have not yet been enacted. In re Cox 687 N.Y.S.2d 594, 595 (Sur. Ct. Cattaraugus County 1999).

Caution should be taken not to confuse these estate recovery rules with the recovery rights against the estate of a legally responsible spouse. The New York Court of Appeals has analyzed the right of recovery against the estate of a spouse of a Medicaid recipient. In Estate of Craig , 82 N.Y.2d 388, 604 N.Y.S.2d 908 (1993), recovery was denied against the estate of the surviving spouse because the surviving spouse did not have sufficient income and resources to pay for her husband's medical services at the time the expenses were incurred. Without the ability to pay, the court held that the spouse was not a legally responsible relative under New York Social Services Law Section 363(3)(a). Not having sufficient income is generally considered to have no more than the Community Spouse Resource Allowance and exempt resources such as a homestead.

VII. Limits on Enforcement of a Lien Against a Homestead

The amount that may be recovered from enforcement of the lien is limited to the value of services provided while the person was in permanent absence status because the home did not become subject to a lien until the recipient stopped residing there permanently. N.Y. Soc. Serv. Law § 369(2)(a)(ii).

If a lien has been placed on a home, the statute provides that any adjustment or recovery on the lien may only be made when the home is not occupied by a sibling who has an equity interest in the home, who resided in the home for at least one year before the date of the recipient's admission to the medical institution, and who has continued to reside in the home subsequent to the recipient's admission to a medical institution or by a caretaker adult child who resided in the home for at least two years prior to the date of institutionalization while providing care that enabled the person to reside at home, and who has continued to reside in the home since the recipient's admission to the institution. N.Y. Soc. Serv. Law § 369(2)(a)(iii). See similar provisions involving exempt transfers of a homestead, above.

The provisions restraining adjustment or recovery of a lien must be read together with the provisions prohibiting liens and recoveries and the separate provisions governing exempt transfers. A lien is prohibited if a spouse, a minor, blind, or disabled child, or a sibling who has an equity interest in the property resides in the home. The enforcement provisions therefore only apply when a caretaker child resides in the home or, after a lien is placed against real property, a person in one of the protected classes begins to reside in the home.

In addition, a lien may be waived "[i]n cases of undue hardship, as determined pursuant to the regulations of the department in accordance with criteria established by the secretary of the federal department of health and human services." N.Y. Soc. Serv. Law § 369(5).

Medicaid's right of recovery against an estate is not subject to the above prohibitions and limitations that apply to liens when a sibling who has an equity interest or a caretaker child resides in the home. Anomalously, the local department may therefore have a greater right under estate recovery provisions than through enforcement of a lien when a sibling or caretaker child resides in the house. This may enable the local department to obtain recovery from an estate that includes a house in which a sibling who has an equity interest or a caretaker child resides.

VIII. Life Estates

For many older clients who own their homes, a transfer of the home while reserving a life estate is an attractive Medicaid planning option. See, e.g., In re DiCecco (Gersten), 173 Misc. 2d 692, 661 N.Y.S.2d 943 (Sup. Ct. New York County 1997) (in an Article 81 Guardianship proceeding, the court granted the petitioner, who was the son of the alleged incapacitated person, the power to transfer the mother's residence to himself with a retained life estate for his mother). Under the life estate, the grantor has the right to use and occupy the premises, and is responsible for paying costs and expenses in the absence of other directions in the conveyance. In re Estate of Fisher, 169 Misc. 2d 412, 645 N.Y.S.2d 1020 (Sur. Ct. Rockland County 1996) ; In re Gaffers' Estate, 254 A.D. 448, 5 N.Y.S.2d 671 (3d Dep't 1938). From a tax perspective, the reserved life estate gives the donee a stepped-up basis equal to the fair market value of the property at the death of the grantor. I.R.C. § 1014(b)(9); Treas. Reg. § 1.1014-2(b)(1). This limits the amount of capital gains tax liability upon a subsequent sale. This is a great benefit if the home is not the primary residence of the donee because the federal capital gains exemption of $250,000 for an individual ($500,000 for a couple) is applicable only to the sale of a primary residence. I.R.C. § 121 .

Only the value of the remainder interest is considered an uncompensated transfer for Medicaid purposes. 96 ADM-8, at 20. Its value is calculated using the Health Care Financing Administration's Life Estate and Remainder Interest Table. 96 ADM-8, Attachment V; State Medicaid Manual Transmittal No. 64; Treas. Reg. § 20.2031-7.

The life estate is not treated as an available resource, although any rental income or profits received by the life tenant is considered income (reduced by applicable costs, expenses and taxes). 96 ADM-8, at 21.

In creating a life estate it should be sufficient on a deed to include "use and occupancy" language; however, although not required, the practitioner may wish to use language that specifically refers to a “legal life estate.”

The Senior Citizen Homeowners Exemption now specifically applies to persons who hold a legal life estate and property held in trust solely for persons who otherwise qualify for the exemption. 1999 N.Y. Laws ch. 270 amending N.Y. Real Prop. Tax Law § 467(10). The life tenant in possession has been considered the property owner for purposes of taxation and tax exemptions under both the veterans and senior citizens tax exemptions. The Attorney General has stated that the life tenant in possession should be designated the owner for purposes of the assessment rolls and considered the property owner for purposes of taxation and tax exemptions. 3 Op. N.Y.S. Att'y Gen. 45 (1973).

Formerly, the beneficial owner of property held in trust was not considered the owner for tax purposes. 9 Op. Counsel St. Bd. Equalization & Assessment No. 83 (1993). Current law, however, provides that property held in trust solely for the benefit of persons otherwise eligible for SCHE, veteran's exemptions and STAR qualifies for those programs. N.Y. Real Prop. Tax Law §§ 425(3)(c), 458(7), 458-a(5), 467(10).

IX. Use of Trusts

As noted above in VI. Recovery from Estates, for purposes of New York Medicaid estate recovery, an "estate" only includes property passing under a will or by intestacy, and does not extend to assets passing via a lifetime trust. Therefore placing a home into a revocable living trust may protect it from estate recovery. Unlike a transfer with a retained life estate or a transfer to joint ownership, the transfer to a revocable trust triggers no penalty for Medicaid purposes because it is merely a change in the form of ownership. It should be noted that it is unclear if all criteria for a Medicaid lien are met, whether a lien could be placed against a homestead in a revocable trust. See IV. Liens Against the Real Property of an Institutionalized Person, above.

It should be noted that any transfers into trusts and from trusts are subject to the 60 month look back period. Although the transfer into the revocable trust is merely a change in the form of ownership, if assets are later gifted from the revocable trust, during the look-back period it would triggera penalty for institutional Medicaid.

Sometimes a homestead is placed into an irrevocable trust. A Supplemental Needs Trust (SNT) can be used to purchase and own a home for a beneficiary. If the SNT holds title to the house, it is not considered a resource of the beneficiary even if the beneficiary moves out of the house. See I. The Homestead as an Exempt Resource, above.

A homestead may also be placed into an irrevocable trust commonly referred to as Medicaid Qualifying Trusts or income only trusts. To the extent principal may be returned to the grantor of a trust, it is considered or deemed an available resource of the grantor. 18 NYCRR § 360-4.5(b)(1)(ii). Payments allowed or made to or for the benefit of the grantor are considered available income. 18 NYCRR § 360-4.5(b)(1)(iii). The income interest may include any net rental income from the property placed in the trust. A transfer into an irrevocable grantor trust that prohibits payment of principal to the grantor is subject to the 60 month look back period and will create a penalty period of ineligibility. 18 NYCRR § 360-4.5(b)(1). The transfer of the homestead to such an irrevocable trust would trigger the penalty period. In addition to an income interest, the trust would commonly give the grantor the right to live in real property owned by the trust. However, unlike a life estate, Medicaid does not allow a reduction in the value of the transfer based on the retained life interest in the trust property.

Trusts were commonly used to accomplish transfers of the homestead and provisions (such as a testamentary power of appointment) were included that would avoid the payment of gift tax. Provisions for lifetime powers of appointment were also included in order to preserve the homestead exemption from capital gains tax in case the home was sold. Powers of appointment should not effect the validity of the trust for Medicaid purposes. However, changes to the state and federal gift tax law make them unnecessary in most cases.

X. Strategies for the Community Spouse

A community spouse may establish at a fair hearing or at a support proceeding in family court that the Medicaid minimum monthly maintenance needs allowance (MMMNA) is inadequate because of exceptional circumstances causing significant financial distress. N.Y. Soc. Serv. Law § 366-c(8)(b) ; see 42 U.S.C. § 1396r-5(e)(2)(B). New York's regulation amplifies the meaning of the statute: "[s]ignificant financial distress means exceptional expenses which may be of a recurring nature or may represent major one time costs, and may include but are not limited to: recurring or extraordinary noncovered medical expenses (of the community spouse or family members as defined in the Directive); amounts to preserve, maintain or make major repairs on the homestead; and amounts necessary to preserve an income-producing asset.'' 18 N.Y.C.R.R. § 360-4.10(a)(10).

Medical expenses, automobile costs related to a special van required to transport the institutionalized spouse, consumer debt incurred as a result of the special needs of her husband's illness, and home maintenance costs were held to be exceptional expenses that justified an increase in the MMMNA to alleviate financial distress in In re Naccarella . N.Y.L.J., July 8, 1996, at 34 (Fam. Ct. Monroe County). The institutionalized spouse was receiving long-term care in a hospital because he suffered from Alzheimer's Disease. The community spouse had an income of $2,400. The court awarded $1,000 per month in support from the income of the institutionalized spouse but declined a further increase for other claimed expenses, including a voluntary double mortgage payment to accelerate paying off a mortgage, payments into a retirement account, and other expenses found either to be unrealistic or unsubstantiated.

In the 1997 case of Allen v. Allen , 236 A.D.2d 470, 653 N.Y.S.2d 661 (2d Dep't 1997), the Appellate Division, Second Department, denied a request by a community spouse for an increase in the MMMNA. The community spouse was earning an unspecified salary above the MMMNA, and sought to increase a family court support order from $600 to $760. The court denied the request, noting that the community spouse's earned income was greater than the MMMNA, she was making a $100 monthly contribution to an annuity, and she maintained a retirement home. The court did not deny her right to a retirement home but, because she was not in significant financial distress, the cost of its maintenance should not be subsidized by her husband's income at the expense of the public fisc. Allen v. Allen, 236 A.D.2d 470, 471, 653 N.Y.S.2d 661, 662 (2d Dep't 1997)

The community spouse may also use excess assets to make repairs or renovations on the primary residence, which is not counted for purposes of Medicaid eligibility. Of course, additional planning may be necessary to assure that the home is not subject to a Medicaid lien if the community spouse is institutionalized or to Medicaid's estate recovery after death.


Goldfarb Abrandt Salzman & Kutzin LLP