Medicaid Planning in a Turbulent Economy

In the current turbulent economic climate people are finding that the values of their assets from their homes to their investment portfolios to their retirement accounts are declining substantially. Such decline of value has implications for those who are seeking to engage in Medicaid asset preservation planning.

In Maryland, the Medicaid authorities consider the assessed value of real property for property tax purposes to be the fair market value of such property. This assumption is used, for example, to determine whether a house is transferred to a family member for less than full value. Hence, if a parent conveys a house with an assessed value of $400,000 to her son or daughter, and the child pays the parent only $200,000 for the property, then Maryland considers the transfer to be a gift of $200,000 from parent to child and penalizes the parent with Medicaid ineligibility. Remember, an individual will be ineligible for Maryland Medicaid one month for each $4,300 given away. Hence, such $200,000 gift gives rise to more than 46 months of Medicaid ineligibility. Such period of ineligibility would be longer if the child pays nothing for the property.

Concern arises in a falling real estate market where a house assessed at $400,000 will only fetch $380,000 when sold to an unrelated third party buyer in an arms-length transaction. Clients have been asking me: Will the state consider that I have given away $20,000 when I sell my house?

The problem is compounded in a situation where a realtor has determined that such house will sell for only $380,000, and the house is listed on the open market at that price. After many months of attracting no full price bids, the child of the seller decides to buy it at the offering price, a price that is in line with comparable houses that have recently sold in the neighborhood. Even though by all standard business measures this price would be considered fair market value, the question again arises: Would the state consider that the seller made a $20,000 gift when selling the property?

These are valid concerns, especially now that any Medicaid ineligibility period for a gift of assets does not begin to run until the seller of the property is out of money, residing in a nursing home, and would otherwise (but for such gift) qualify for Medicaid benefits. In other words, if such transaction is considered to be a gift, the adverse consequences of such transaction will not occur until after the seller is impoverished and resides in a nursing home with no personal assets remaining to pay for her care.

There are ways to deal with this problem, either before or after the transaction has occured. Prudence suggests that seniors whose real property has declined in value seek competent legal counsel before transferring their real property so that the transaction may be structured to avoid possible Medicaid ineligibility in the future.