HOW TO KEEP THE US GOVERNMENT FROM TAKING YOUR HOME FOR MEDICAL EXPENSES

Result: Untested. I researched this for a friend whose parents are getting older, and nobody has run it yet. The best protection is one most families already have and do not know about: a child who lives at home as the caregiver. Federal law lets a parent give the home to that child with no penalty, and Colorado will not take the home back through estate recovery while that child keeps living there. The paperwork decides it, so start collecting it now and hire an elder law attorney.

The Problem

This is a uniquely American problem. It would be hilarious if it were not so effective at enforcing the US caste system.

The Omnibus Budget Reconciliation Act of 1993 requires states to recover what Medicaid paid for long-term care after the recipient dies. That covers anyone who got nursing home or home and community-based care at age 55 or older. The state can put a lien on the home if the person is not expected to return home, and go after the estate after death. Some states reach past the probate estate into jointly held and trust property too.

Hypothesis: Know the rules early enough, and the family home does not have to go to the state.

The Solution I Would Try

In order, starting with the cheapest.

1. Check the automatic exceptions

The state cannot recover while any of these are alive:

• A surviving spouse
• A child under 21
• A child who is blind or permanently disabled

A transfer of the home to a spouse is also penalty-free.

2. Use the caregiver child rule

This is the one that fits my friend’s family: his brother has lived in the home as the caregiver for years.

The rule: a parent can transfer the home, penalty-free, to a son or daughter who lived there for at least two years before the parent went into a nursing home, and whose care kept the parent at home instead of in a facility. A sibling with an ownership stake who lived there a year gets similar treatment. Adopted children count, with adoption records as proof.

Two ways to use it:

• Transfer the home to the caregiver. No look-back penalty and no estate recovery on the house. The catch is taxes. A gift passes along the parent’s original cost basis, not the stepped-up value at death. If the caregiver lives there as their main home for 2 of the 5 years before selling, the $250,000 single or $500,000 married capital gains exclusion softens that.
• Leave the home in the parent’s name. Colorado bars recovery against the home while a qualifying caregiver child keeps living there continuously, and the child inherits with a stepped-up basis. The catch: the protection lasts only as long as they live there.

The paperwork (what states usually ask for):

• Proof of the relationship: birth certificate or adoption records
• 24 months of address records at the home: utility bills, tax returns, voter registration, bank statements
• A detailed physician letter on the parent’s care needs and how the child’s care kept them out of a facility
• Dates for the transfer and the Medicaid application

Colorado does not pre-approve exclusions. Gather all of this while the parent is alive.

3. Plan 5 years out with an irrevocable trust

Gifts made within 60 months of applying get penalized. Move the home into an irrevocable Medicaid asset protection trust more than 5 years ahead, and it is generally out of reach.

• It has to be irrevocable. A revocable trust still counts as the parent’s asset.
• Draft it to keep the step-up. The IRS ruled in 2023 that a home in a trust kept out of the parent’s estate gets no step-up at death. A retained right to live there, or a limited power of appointment, keeps it in the estate for tax purposes. Bad wording can trade one benefit for the other, so this one needs a lawyer.

4. Insure it

Long-term care insurance keeps you out of Medicaid entirely. In 2026 a couple buying at 55 paid about $5,010 a year for $165,000 in initial benefits with inflation protection.

5. Ask for a hardship waiver

States can waive penalties for undue hardship. In Colorado, good cause includes heirs who would otherwise need public assistance, or a home that is part of a working farm, ranch, or business.

What Not to Do

An earlier version of this post had a few of these. They are wrong.

• Selling the home for $1 does not get a stepped-up basis. It is a gift, so the buyer takes the parent’s old basis. It is also a transfer inside the look-back window.
• A revocable trust does not protect anything. Medicaid counts it as yours.
• Do not deed the home to a friend’s LLC. It is a penalized gift for 5 years, the house now belongs to someone else (and their creditors and divorce), and deducting expenses on a house a parent lives in rent-free will not survive an audit.

What If There Is a Mortgage?

Most mortgages have a “due on sale” clause. Federal law stops the lender from using it on homes with fewer than five units when:

• The borrower’s spouse or children become an owner
• The home goes into a living trust where the borrower is and remains a beneficiary, with no change in who lives there

Open Questions for the Attorney

• Does the caregiver rule apply if the parent gets Medicaid care at home instead of in a nursing home? The statute is written around entering a facility.
• Which state are the parents in? Look-back periods, estate definitions, and hardship rules vary.
• Does that state reach non-probate property, like a beneficiary deed?

The Long-Term Fix

The timing of this law is suspicious. From 1981 to 1988, the top US federal marginal tax rate dropped from 70 to 28 percent. The economic consequences of major tax cuts for the rich found these cuts led to higher income inequality and no change in economic growth or unemployment.

Ironic that many of the people who voted for the politicians behind these policies will be hurt by them in old age. It does not have to be this way. We could raise taxes on the ridiculously wealthy and fund these domestic health care programs.