Retitling Assets When a Spouse Needs Medicaid to Pay for a Nursing Home

When you or your spouse faces the need for long-term nursing home care, you might consider retitling some assets in your spouse's name to prepare for Medicaid eligibility. Retitling certain assets can even make sense after Medicaid coverage has begun. Medicaid doesn't count gifts to a spouse (or to disabled or minor children) as transfers that cause a period of ineligibility during the five-year Medicaid look-back period, so you have an opportunity to preserve some assets for your family.

This article explores when you can retitle assets, including your home, your life insurance policies, and your retirement accounts.

Why a Spouse Who Needs Medicaid Long-Term Care Might Retitle Their Assets

Since Medicaid is a needs-based program, there are limits on the amount of assets that Medicaid applicants and their spouses can own. A Medicaid applicant who needs nursing home care or "home and community-based services" (HCBS) is normally allowed to keep only between $1,500 and $2,000 in assets after qualifying for Medicaid. The healthy spouse, also known as the "community spouse" (the one staying in the community rather than living in a nursing home) can keep a much higher amount, called the community spouse resource allowance, to pay for future living expenses (more on this below).

One reason to retitle assets like life insurance policies is to keep the Medicaid applicant's assets under the limit established by federal and state law. Another reason to retitle assets, like the deed to your home, is to maintain eligibility should the community spouse die (in which case no one might be living in the house, and it could become subject to Medicaid's asset limit in some circumstances).

Before or after applying for Medicaid, Medicaid applicants can transfer certain assets to their spouses without penalty. Transferring assets sooner than later can avoid future problems, as discussed below.

Medicaid and Home Ownership: When It Makes Sense to Retitle Your Home

Married couples traditionally own their homes jointly, unless they choose to keep their property separate (such as when the home was already in the name of one spouse before the marriage or when one spouse inherited the property during the marriage). When a couple owns the home in both names, you may want to consider transferring the title to be in the sole name of the community spouse.

The home isn't usually a countable asset for Medicaid if the community spouse will continue to live there, so you probably don't need to worry about your home when you apply for Medicaid, unless you have so much equity in your home that Medicaid would count your house as an asset. But there are a few reasons to transfer a deed for a home to the community spouse's name after qualifying for Medicaid.

First, if the Medicaid applicant/recipient becomes incapacitated, the future transfer or sale of the house may be difficult.

Second, if the property is owned jointly with "rights to survivorship," as many couples' houses are, and the community spouse dies before the Medicaid recipient, the house could become a countable asset of the Medicaid recipient (unless the recipient intends to return to live in the home). The Medicaid recipient may then have to sell the house to maintain eligibility for the nursing home. But then, when the home does sell, the proceeds will belong to the Medicaid recipient and will disqualify the recipient from Medicaid eligibility for a period of time. If the home is owned jointly without any survivorship rights, and if the community spouse dies, it might have to be placed on the market for sale.

Third, and perhaps most importantly, if the home is transferred to the name of the community spouse, Medicaid won't be able to place a lien on the property to recover the Medicaid payments made on behalf of the Medicaid recipient. (In many states, after the Medicaid recipient dies, Medicaid is allowed to reclaim the cost of care by forcing the sake of certain assets.)

Transferring the title of the home to the community spouse will avoid "estate recovery," since the home will no longer be part of the Medicaid recipient's estate. (Note that Medicaid can't try to recover your assets while your spouse is still living; for instance, Medicaid can't take a jointly owned home when one or both spouses are alive.)

Transferring Ownership of Life Insurance for Medicaid

Only one type of life insurance counts as an asset for Medicaid purposes: whole life insurance. Term life insurance doesn't count as an asset, because it doesn't accumulate a cash value over time.

All states exempt small whole life insurance policies from being counted as assets. But in most states, only policies with a death benefit of $1,500 or less are exempt from being counted. A few states exempt policies that pay up to $10,000 in death benefits. If you have life insurance policies that total over $1,500 in face value, Medicaid will count the cash surrender value of those policies as assets.

Unlike retirement accounts, life insurance doesn't consist of any tax-deferred contributions, so cashing out a life insurance policy is a reasonable way to obtain the cash value, which can be transferred to the community spouse. Unfortunately, liquidating a life insurance policy results in a loss of the death benefit, which can be substantial.

Another approach is to simply transfer ownership of a life policy to the community spouse. This transfer doesn't disqualify the Medicaid applicant, since transfers to a community spouse are allowed. This way, the death benefit remains intact. If you transfer ownership of a life insurance policy to the community spouse, the cash value becomes part of their community spouse resource allowance (CSRA). The community spouse is usually allowed to keep about $150,000 in assets, although the CSRA varies by state.

A third option is to transfer a life insurance policy to a minor or disabled child. But Medicaid would consider a transfer of a policy to an adult child who isn't disabled to be a gift that's subject to the five-year look-back period, which could cause a period of ineligibility.

Medicaid and Retirement Accounts

Some assets present specific problems for Medicaid eligibility, and retirement assets are among the most problematic.

The Medicaid Applicant's Retirement Accounts

Most states count retirement plans like 401(k) plans and IRAs as assets for Medicaid eligibility purposes. And you can't transfer a retirement plan into your spouse's name. If you don't mind paying some taxes, you could cash out a retirement plan and use the fund to purchase a Medicaid income annuity to provide your spouse with income. (A spouse's income doesn't count toward eligibility for the Medicaid applicant.)

About a dozen states don't count retirement plans as assets, including some populous states like Florida, Georgia, New York, and Texas. But in those states, a Medicaid applicant's retirement plan has to be in payout status to be exempt from being counted as an asset.

When a retirement plan is in payout status, required minimum distributions would be paid out from the account (if the Medicaid applicant is age 73 or older). And Medicaid would count those payments as income against its income limit for long-term care (in most states, about $2,800 a month), which could make a Medicaid applicant ineligible for long-term care coverage.

It's possible that the Medicaid applicant could transfer some or all of the retirement plan distributions to their spouse: A spouse who doesn't have enough income in their own name is entitled to some of the Medicaid applicant's income. That amount, called the monthly maintenance needs allowance is between $2,500 and $3,800, depending on the state.

Retirement Accounts Owned by the Spouse of a Medicaid Applicant

About half of the states count a spouse's retirement account as an asset when determining a Medicaid applicant's eligibility for long-term care. The other half, including the same four states we mentioned above (FL, GA, NY, and TX) don't count the spouse's retirement accounts as assets, although they require the spouse's retirement plan to be in payout status to be exempt. (Again, a spouse's income doesn't count toward eligibility for the Medicaid applicant.)

In a state that does count spouses' retirement accounts, the community spouse could consider annuitizing the retirement account, which would turn it into an exempt stream of income. This would eliminate the spouse's retirement account as a countable resource (asset).

Because state laws differ with regard to the treatment of retirement accounts, it makes sense to consult an elder law attorney to give you advice that complies with the laws of your state.

Learn more about legitimate methods of planning for Medicaid eligibility.