Will Medicaid take my house?

“Will Medicaid take my house if I end up in a nursing home?”

It’s a question that TIAA wealth management advisors get a lot, even though it’s a remote risk for most clients. “A lot more people think they’re going to qualify for Medicaid than actually do,” said Colleen Carcone, a tax-and-estate specialist with TIAA’s wealth planning strategies group. So let’s break it all down, starting with the basics:

• What’s the difference between Medicaid and Medicare, and do both pay for long-term care? Medicare is a federal entitlement program, a health insurance plan for the elderly that is paid for through salary deductions during working years. Medicare doesn’t pay for long-term care. It only covers short-term rehabilitation or nursing home care intended to make you well and get you back home. In contrast, Medicaid is a state-operated program that the federal government underwrites. It operates more as a social safety net, paying for long-term care or nursing homes for people who cannot afford to pay privately.
• Do most seniors qualify for Medicaid? Short answer: no. As of 2022, only 7% of Americans age 65 or older had Medicaid health insurance.¹  For TIAA wealth clients, the percentage is probably even smaller, given the strict income and asset limits on seniors who apply. Medicaid rules vary by state—your TIAA wealth management advisor can help you get the information for your state—but consider the rules for New York. In order for Medicaid to pay for nursing home care in New York, the applicant can have no more than $1,677 in monthly income and no more than $30,182 in total assets. His or her spouse, meanwhile, can have no more than $148,620 in assets.² 

• But what if the cost of long-term care burns through our savings? To qualify for Medicaid, will we first have to sell our house? Probably not. Medicaid does not consider your primary residence as a countable asset unless the equity in your home exceeds certain thresholds—which, for 2024, ranges from $713,000 to $1,071,000 depending upon your state.³  After you die, however, federal law does require states to try to recover the cost of Medicaid from your estate—and this is where it gets tricky.
• But we want to leave our lake house to the kids. Would they have to sell it to pay Medicaid back? Possibly. There are ways around this, though each has its own pros and cons. 

  The simplest solution might be to gift the lake house to your kids, which gets the asset out of your estate. Keep in mind, however, that Medicaid eligibility comes with a lookback period—a five-year window for which Medicaid will examine whether an applicant transferred assets at below-market value.⁴  Such a transfer can trigger a penalty period of Medicaid ineligibility. In other words, if you want to gift your lake house to the kids, you cannot wait to do so until right before you need long-term care. “You’ve got to do it before you would be close to needing Medicaid,” said Melody Evans, a TIAA wealth management advisor in the Boston area.

  This is why it’s never too soon to consult with your wealth advisor. They can connect you with a tax-and-estate lawyer who can assist with planning, if necessary. 

  One downside to gifting is that your kids would lose the step-up in cost basis that is available to heirs when a house is inherited rather than gifted. They could be saddled with a hefty capital gains tax bill when it comes time to sell. Imagine, for example, that you bought your lake house for $300,000 in 2000 before you retired, and today the house is worth $900,000. Your kids would be liable for capital gains taxes on the $600,000 difference should they sell.

  A more tax-efficient solution could be putting the house in a special kind of irrevocable trust known as a Medicaid Asset Protection Trust (MAPT). If the MAPT is structured properly, the house would be eligible for the step-up in cost basis when the grantor passes away. One downside is that setting up irrevocable trusts can cost thousands in estate-attorney fees. A second is you’ll lose control over the asset, just as you would by gifting it. You can’t remove middle-child Tommy as a trustee or beneficiary just because he’s been annoying you. Finally, you may be out of luck if you decide, later on, that you want high-end assisted living from a facility that does not accept Medicaid. Since the lake house is no longer your property, you can’t sell it to pay for care.Said Evans, “This is why it’s important to get educated early on about different kinds of care, what it costs, and how it’s covered."