Saving the Family Home from a MERP Claim
By Craig Watson, Texoma LIVING WELL Magazine
Carol’s mother had been in declining health. After an illness, hospitalization and three months in a rehabilitation center, she was too weak to live alone so she was admitted to a nursing home. Medicare paid for the hospital and rehabilitation center but it did not cover nursing home care. The nursing home business manager offered to help Carol complete an application for Medicaid because her mother could not afford the cost of a nursing home. Carol’s mother’s only asset was her home. The business manager explained that Carol’s mother could qualify for Medicaid even though she owned a home. Carol, as her mother’s only child and agent under her power of attorney, was required to sign the Medicaid application since her mother could not sign. The Medicaid application disclosed that the state of Texas recently passed into the law the Medicaid Estate Recovery Program, also known as MERP. Carol was shocked to read that MERP authorizes the state to file a claim against her mother’s home after her death to seek repayment of the cost of Medicaid care. Carol knew that her mother would be crushed if she found out that her home could be sold after her death with all the proceeds going to the state. Carol made an appointment to see an elder law attorney to ask if anything could be done to save her mother’s home.
The elder law attorney explained that her mother could avoid the future MERP claim by deeding the house to Carol while retaining a life estate and a general power of appointment in the deed. The life estate and the general power of appointment will both expire upon her mother’s death. The attorney explained that a life estate is the right to use and enjoy the house for the rest of her life. At the instant of her mother’s death, the life estate would expire and the house would pass to Carol without probating her mother’s will. However, the transfer of a life estate alone would normally cause her mother to be disqualified from Medicaid which would be catastrophic. The problem is that the transfer of the life estate would be deemed a gift. Making a gift within five years of applying for Medicaid causes the applicant to be disqualified from Medicaid for five years.
The elder law attorney solved the problem by including a clause in the deed called a general power of appointment. By retaining a general power of appointment, Carol’s mother would be retaining the power to revoke the transaction. The power to revoke the transfer of the life estate makes the transfer an incomplete gift. An incomplete gift does not trigger the Medicaid five year transfer penalty because the transfer is not yet complete. Also, if her mother needed to sell the house, she could first revoke the gift so she would receive 100% of the sales proceeds. The gift would become complete upon the death of Carol’s mother because she will no longer be able to revoke the gift. The life estate retained by Carol’s mother will also expire upon her mother’s death so Carol would then be the sole owner of her mother’s house. It would all happen automatically without the need to probate her mother’s will.
The house would stay in her mother’s name for the rest of her life so the property taxes would not increase because she is over the age of 65. The house would also stay in her mother’s name for federal income tax purposes. That means that Carol will receive a step up in tax cost basis to the house’s fair market value at the time of her mother’s death. The effect of this rule is that Carol would be able to sell the house after her mother died and not have to pay any capital gains tax. The attorney explained that the only “drawback” is that a future legislature might decide to change the law without grandfathering people who had relied on the law in good faith.
Carol was very pleased because she knew that this was what her mother wanted. The deed would not cause her mother to be disqualified from Medicaid but would protect her mother’s house from a MERP claim and save her mother’s estate from the cost of probating her will. All of her goals were successfully accomplished.
Craig Watson’s law practice focuses on Estate Planning, Probate, Guardianship and Elder Law. Formerly a CPA, he has 25 years of experience. Call 903-813-8500 or go to www.craigwatsonlaw.com.
