Throughout my practice, what is colloquially known as a Medicaid or 1% deed has proven to be a viable and popular tool among practitioners and clients alike. In this blog, I will discuss the mechanics behind this technique and the aspects that are often misunderstood. While preparing a general warranty deed can sometimes be a straightforward legal service, the nuances and considerations involved in a Medicaid deed are complex and frequently overlooked. Unfortunately, I have observed many general practitioners offering Medicaid deeds as a service due to the seemingly simplistic nature of the task. Additionally, there is often conflation among practitioners and the public regarding Medicaid deeds and Ladybird deeds, which are very different. In a follow-up blog, I will discuss Ladybird deeds. This blog will be divided into three parts: the purpose, methodology, and the benefits and risks of a Medicaid deed.
What is the Purpose of a Medicaid Deed?
The purpose of a Medicaid deed is to preserve eligibility for Medicaid benefits in a skilled nursing facility while also avoiding a recovery claim by Medicaid’s estate recovery program for any benefits received. For context on the Medicaid program for skilled nursing care and its rules, refer to this blog: https://blog.lawfirmcarolinas.com/north-carolina-medicaid-planning-the-basics/
Methodology of a Medicaid Deed
The basic premise of a Medicaid deed is that the intended beneficiary of a piece of real property either purchases or is gifted an interest in that property from the client i.e. the person planning for Medicaid. The interest typically used is 1%, hence the name, but it can be another percentage or even a fractional portion, such as half of one percent.
Why the 1% or other small interest? The purpose of the small interest is to minimize the purchase price or the sanctionable transfer, if gifted. Although a person’s home is generally not a countable asset for Medicaid purposes, it remains a recoverable asset from the estate of someone who receives Medicaid benefits and is also subject to the “5-year lookback” period. A person can receive Medicaid benefits and continue to own their home; however, upon passing, Medicaid will have a claim against their estate for the amount of benefits paid. Thus, the home must be protected, and due to the lookback period, a person cannot simply transfer it out of their name without receiving fair market value when they need Medicaid. Accordingly, a small fraction is gifted or sold to minimize the penalty or purchase price.
Similar issues arise with non-home site property, as it is a countable resource, making it impossible for a person to qualify for Medicaid while owning it and due to the lookback period, it cannot simply be transferred when Medicaid is needed. A Medicaid deed also converts countable real property into a non-countable asset while minimizing the purchase price or gift. In addition to home site property, certain real property interests are non-countable for Medicaid; one such interest is property owned as tenants-in-common, which the Medicaid Manual defines as jointly owned property by two unmarried individuals. From a legal standpoint, this definition is inaccurate, or at least incomplete, as jointly owned property by two unmarried individuals can be either tenants-in-common or joint tenancy.
In addition to the small fractional interest, a critical component of a Medicaid deed is the language that creates joint tenancy with rights of survivorship. While joint tenancy with rights of survivorship is legally distinct from tenancy-in-common, it meets the Medicaid Manual’s incomplete definition. Without survivorship language, a Medicaid deed is nearly useless. For home site property, creating jointly owned property does not accomplish much because the property is already non-countable. By adding survivorship language, the deed sidesteps an estate personal representative’s ability to bring such property into the estate to pay claims, thereby removing the property from Medicaid estate recovery. For non-home site property, while a Medicaid deed may make the property non-countable, without the survivorship language, the retained 99% or other large portion remains recoverable by Medicaid estate recovery.
To calculate the values of the sale or gift, the North Carolina Medicaid Manual permits the use of the county tax value. When a life estate is reserved, the fraction used to calculate the remainder interest is based on the Social Security Life Estate/Remainder Interest Unisex Table, using the age of the Grantor, or the oldest Grantor, at the time of the transfer or sale. Reserving a life estate is generally recommended for a couple of reasons. First, it allows the client to be the only party with a freehold possessory interest. Second, it further reduces the value of the gift or purchase price because only a percentage of the remainder interest is conveyed or sold. Although some practitioners feel that reserving a life estate while also having an undivided interest in the remainder interest as a joint tenant with rights of survivorship is counterintuitive, this concept is permissible under North Carolina statutory and common law. While it is true that a life tenant who owns a portion of a remainder interest with rights of survivorship will never be vested in that remainder interest, the interests are distinct and carry certain present rights and obligations. In other words, a future interest, regardless of whether it will ever vest, bestows distinct present interest rights and obligations. Additionally, the rights of survivorship combined with the life estate ensure that the remainder interest never vests in the estate of the client, preventing the large portion of real property from becoming a recoverable asset.
In summary, two critical mechanisms work in tandem to make Medicaid deeds effective. First, the fragmented interest minimizes the purchase price or penalty under the lookback period. Second, the survivorship language renders the property non-recoverable. Accordingly, for home site property, it becomes non-recoverable while avoiding a large purchase price or meaningful penalty during the lookback period. For non-home site countable real property, it converts the property into a non-countable and non-recoverable asset while avoiding a large purchase price or meaningful penalty during the lookback period.
Benefits and Risks of a Medicaid Deed
The downsides of a Medicaid deed are that the client conveys a permanent and irrevocable interest in their real property. Despite being a fractional future interest, unlike a Will, the client cannot later change who will inherit that piece of property at death without going through the individual to whom the interest has been transferred. Additionally, that individual and their spouse must join in any future sale or refinance of that property. If the individual added to the property has or acquires civil judgments against them, those judgments could attach to the property. Lastly, a federal gift tax return is required for gifts of future interests of any amount. Although no gift tax will likely be due for anyone engaged in Medicaid planning, this is still an administrative task that may require additional tax preparation fees.
To mitigate these risks, a family agreement can be executed, whereby the individual granted an interest and their spouse agree to reverse the conveyance upon request, sign off on any sale or refinance at the request of the client, and attest that they have no civil judgments against them.
Finally, there are a couple of important and often overlooked aspects of a Medicaid deed. First, a Medicaid deed does not guarantee a client’s eligibility. There is a rigorous application process that examines a person’s countable resources and any transactions during the five years prior to the application. Second, once a person begins receiving benefits, they are no longer permitted to keep their income except for a small allowance. The Medicaid recipient’s income is paid to the facility as patient monthly liability. If there is a spouse at home, the spouse at home may keep some or all of the Medicaid recipient’s income if the spouse at home’s income is below the minimum monthly maintenance needs allowance. This is crucial because the client’s family members will need to be prepared to pay the taxes, insurance, maintenance, and other expenses for the property. Any such costs incurred will essentially be an investment in the real property being protected for their inheritance.
In summary, a Medicaid deed is an effective tool to protect real estate with many benefits; however, it is essential that the attorney understands the nuances and that the client comprehends the benefits and risks of the tool.