Your mother may protect a significant portion of her wealth by owning a home or purchasing a home, given the condition that she resides in that home for some period of time, and if she moves from the home, it has to be with the intent to return when able. Medicaid will require her or you to sign a document to this effect.
I often have clients whose mothers reside with them. Your mother can actually purchase an interest in your home; she does not need to own 100% of the house. In buying a portion of your home, she can shelter some of her money, but this has to be done using the fair market value of the home. Any taxes owed must be dealt with, and you also have to make sure that there are no liens on the property at the time of purchase. In order to ensure that this strategy is executed correctly, I recommend that my clients use a title company to check that everything is in order. This generally adds about a 1% cost to the purchase.
If your mother purchases a life estate (a property interest that gives someone the right to live in the home for the remainder of his or her life) in your home, then it will be considered a transfer of assets until she has resided in the home for one year.
The primary residence strategy has a few key weaknesses to keep in mind (assuming your mother uses your home for the strategy):
- Sibling ownership: If your mother does purchase an interest in your home, she may want her interest to go to her kids upon her passing. That means that your siblings might have an ownership interest in your primary residence after your mother’s death.
- Mother’s demeanor: As people age, their personalities often change significantly. While it may sound horrible, there could come a time when you do not want your mother to live with you any longer. In order to get your mother to move, you would actually have to buy her out of her interest in the home. I often encourage people to put aside some money to buy her out, regardless of their love for her.
- Difficulty moving: There is also the possibility that you might want to move. This could be an issue if your mother doesn’t want to move and refuses to sell her interest in the property.
- Home appraisal: It can be difficult to determine the value of your home in order to calculate your mother’s ownership interest. People often try to use the tax appraisal values for this purpose. However, this assessment might not be an accurate picture of the home’s true value. The only way to come to a fair purchase price is to contact a real estate agent and ask for information on comparable sales (comps).
If you have a mortgage, your mother must buy out your equity before paying down the mortgage amount. For example, let’s say your home is worth $350,000, you have a $300,000 mortgage, and your mother purchases $30,000 of equity in your home. That would leave you with $20,000 of equity, or 40%, and her with $30,000 of equity or 60%. Now, let's assume your mother purchases $100,000 of equity in your home. In this situation, your mother would become the full owner of the property, and the remaining $50,000 would apply to the mortgage.
Rental Income from Primary Residence
If your mother wants to rent her property while she is receiving Medicaid benefits, there are specific rules that need to be followed. If your mother intends to return home within six months, your mother may rent out the residence for the cost of taxes, insurance, and other expenses to maintain it. That way the home is kept up, and there is no need to pay net rent to the nursing home.
When your mother does not have an intent to return home in six months the plan to rent becomes a lot more difficult. If your mother has a mortgage and wants to rent out her property, the following rules apply:
- If your mother’s homestead is vacant and a third party is making her mortgage payments using her own funds, these payments are not income to your mother.
- If your mother’s homestead is rented and the lease agreement specifies that the tenant should pay your mother’s mortgage company in lieu of rent, these payments are countable income to your mother and are treated as rental income.
- If your mother’s homestead is rented and there is no lease agreement, voluntary payments of your mother’s mortgage by the tenant directly to the mortgage company are considered to be a “gift” to your mother and are countable income.
If you plan to rent out your mother’s home while she is in a nursing home and Medicaid is paying for her care, the following points will need to be followed:
- If your mother has a living spouse, then the simplest option is for her to transfer ownership of the home to her spouse. She should draft a deed in favor of her spouse and disclaim all ownership interests. This transfer is not subject to the penalty because it is made to a community spouse.
- If your mother does not have a living spouse, another person will have to make the principal payments on the home. Your mother cannot make principal payments, as this is seen as a transfer of assets, but she can make interest payments.
- If your mother does not have a mortgage, her durable power of attorney should sublet the property for only the taxes, insurance, maintenance, and other expenses.
- If there is a mortgage, your mother’s durable power of attorney can also sublet the home for the principal payments.
- You, personally, will not be able to keep any profits. If you make a profit, you’ll need to give it to the nursing home. If you do keep any profits, the Health and Human Service Commission will report you to Texas Adult Protective Services for exploitation.
- If the durable power of attorney cannot find a subletter, they can enter into an escrow arrangement with a real estate agent who manages the property. This might require a court order to prevent distribution from the escrow account to your mother and ensure that the assets will not be counted as a resource by Medicaid.
The Home Maintenance Deduction
If your mother intends to return home within 6 months of being admitted to an institutional setting, she may deduct a “home maintenance allowance” from her monthly copayment to pay her mortgage or rent payment and utilities. This amount is based on her mortgage or rent payment and average utility charges, excluding telephone, and cannot exceed the SSI income limit ($783 in 2020). Your mother must meet all of the following criteria in order to qualify:
- Your mother must claim that she plans to be in the institution for between one and six months;
- A health practitioner must verify that your mother is likely to leave the facility in less than six months; and
- Your mother is deemed necessary to take care of her home.