How to prevent the US government from taking your home for medical expensesGovernment mandated home seizure, Medicaid Estate Recovery, United States healthcare, malicious compliance, and peaceful protest
This is a uniquely American problem, which would be hilarious if it was not so effective at enforcing the US caste system: the Omnibus Budget Reconciliation Act of 1993 requires state governments recover long term care benefits paid for by Medicaid after the recipient dies. Yes, state governments can take your home by filing a lien against it, if you are unable to return home, or other property titled in your name when you die, your (probate) estate.
If you have a surviving spouse, a child under age 21, or a child that is permanently disabled or blind then a state’s Medicaid program will not come after your estate. See Colorado and Florida laws for reference. If one of those situations apply, then stop reading, you’re good to go.
Avoiding Medicaid long term care
If possible, purchase a long-term care insurance plan in your mid 50s or 60s to avoid going into this Medicaid estate recovery situation. A premium of a few thousand dollars a month may be untenable for some.
At least 5 years before applying for Medicaid long term care benefits, you need to retitle your assets by putting them in a business entity or trust. If you give any gifts or transfer any assets within 5 years of attempting to start Medicaid long term care benefits, that will be a penalty considered against your benefit.
If you choose to set up a trust for your assets, you will need a trustee (who will take a management fee); it is most efficient to find a lawyer who will both draft the trust documents and act as the trustee. Largely, you want to compare Revocable and Irrevocable trusts. The former can be changed after creation, the later cannot and confers some estate tax benefits.
If you already trust a family member or close friend then retitle your assets under a business (an LLC is easiest). You will need to create an LLC yourself or have a registered agent company do it for you. You will probably want them to create a manager managed LLC, get a tax id, and file your annual report. The single member and initial manager will be the close friend or family member; they will be reporting expenses and revenue from the LLC on their taxes and could use this to take hefty tax deductions if done right.
- Sell the assets to the business or trust at below market value ($1?) and be sure to close with a warranty deed. This will allow the new owner to use a stepped-up tax basis.
- Get a real estate insurance policy for the business or trust through National Real Estate Insurance Group.
- If you plan on living in the home use a local property manager contracted through the business which will give you some flexibility to create a zero dollar lease agreement. If not, use a full service company like Nomad Lease to manage everything.
What if I have a mortgage?
Most mortgages contain an “acceleration” or “due on sale” clause.
This means that when you transfer a mortgaged property out of your name, the entire mortgage balance is due.
However, this is not usually a problem when we are not selling your house but, rather, transferring it for estate planning purposes. In fact, federal law specifically prohibit a mortgage holder from exercising a “due on sale” clause on residential real property containing less than five dwelling units or on a cooperative apartment unit when the property is transferred to a spouse or children of the owner, or a lifetime revocable or irrevocable trust where the borrower retains the right to occupancy.
This came from banks not wanting borrowers to get a deal on a lower interest rate.
If you were to transfer or sell your home to your children where your right of occupancy remained the same, a lender could not enforce an “acceleration” or “due on sale” clause: https://www.law.cornell.edu/uscode/text/12/1701j-3
In Colorado, your interest rate cannot go up by more than 1% for a sale: https://law.justia.com/codes/colorado/2021/title-38/article-30/section-38-30-165/
I find the timing of this legislation to recoup Medicaid long term care payments suspicious. From 1981 to 1988 the marginal tax rate on the wealthy at the US national level dropped precipitously from 70 to 28 percent. As shown in The economic consequences of major tax cuts for the rich these policies lead to higher income inequality and no change in economic growth or unemployment.
Ironic that many of the people who voted for the politicians that enacted these policies will now be hurt by these policies in their old age. It does not have to be this way, we could choose to increase taxes on the ridiculously wealthy and fund these domestic health care programs.