Transfer of Your Home and Medicaid Eligibility

Conventional wisdom says Medicaid 'takes the house.' The reality is more nuanced. During the applicant's lifetime, the primary residence is an exempt asset for Medicaid eligibility purposes as long as the applicant intends to return home, or a community spouse, minor child, blind or disabled child, or qualifying sibling lives in the home. The exemption holds up to a substantial equity cap (currently in the range of $1 million in New York), and equity above the cap can be addressed through structures other than transfer.

Estate recovery is a separate question. Under SSL § 369 and 42 USC § 1396p(b), the state can recover the cost of Medicaid services from the probate estate of a recipient age 55 or older after the recipient's death. The recovery target is the probate estate as defined by New York law — meaning assets that pass under the will or by intestacy, not assets that pass outside probate. A home held jointly with right of survivorship, transferred during life to a trust, or held with a retained life estate at death generally passes outside probate.

The estate-recovery distinction matters because it determines whether the home actually needs to be transferred at all. A married couple holding the home as tenants by the entirety has automatic right-of-survivorship protection — at the institutionalized spouse's death, the home passes to the surviving spouse outside probate, beyond the reach of estate recovery. A single homeowner, by contrast, has no such automatic protection and needs an affirmative structure.

The Medicaid Asset Protection Trust is the cleanest structural solution for protecting the family home. The MAPT is an irrevocable income-only trust drafted under EPTL Article 7 into which the home is transferred by deed. The grantor retains the right to occupy the home for life, the right to receive any trust income (rental income if the home is later rented, investment income on liquid assets in the trust), and the right to direct the ultimate beneficiaries through a limited testamentary power of appointment.

After the 60-month look-back under 42 USC § 1396p(c) expires, the home in the MAPT is invisible to institutional Medicaid eligibility. The applicant has no ownership interest, no power to revoke the transfer, and no access to principal. The trustees (typically the grantor's children) hold legal title. At the grantor's death, the home passes through the trust to the named beneficiaries outside probate, outside estate recovery, and with a full stepped-up basis under IRC § 1014.

The basis preservation is critical. A home transferred outright to children during life carries the parent's carryover basis under IRC § 1015, meaning the children inherit the parent's original cost and pay capital gains tax on the entire appreciation when they sell. A home transferred to a properly drafted MAPT carries the date-of-death stepped-up basis under IRC § 1014, eliminating capital gains tax on pre-death appreciation. The basis difference on a New York City home can run to hundreds of thousands of dollars.

An alternative to a MAPT is a deed with retained life estate. The owner deeds the home to the children (the remaindermen) while retaining a life estate — the legal right to occupy and use the property for life. The remaindermen acquire the future interest but cannot occupy or control the property during the life tenant's lifetime. At the life tenant's death, the life estate ends and the remaindermen own the property in fee simple, outside probate.

A life estate deed shares some MAPT advantages: probate avoidance at death, stepped-up basis under IRC § 1014 (because the life tenant retained a present interest that pulls the home into the gross estate for basis purposes), and after the 60-month look-back, the home is largely outside Medicaid's reach for eligibility purposes. The life estate is computed at a Medicaid-actuarial value for transfer-penalty calculation purposes — the remainder portion is the transfer, the life-estate portion stays with the applicant.

Life estate deeds are less flexible than MAPTs. The remaindermen own the future interest and must consent to any sale, mortgage, or major change in the property. A family disagreement among children can lock the property. A child remainderman's divorce, bankruptcy, or judgment can encumber the future interest. For families with multiple children of varying reliability, a MAPT with the children as trustees (collectively decision-making) is often the better structure.

Federal law at 42 USC § 1396p(c)(2)(A) specifically exempts certain transfers of the home from transfer-penalty treatment regardless of the look-back window. Transfers of the home to a spouse are exempt without limitation. Transfers to a child under 21 or to a blind or disabled child of any age are exempt. Transfers to a sibling with an equity interest in the home who lived there for at least one year before the applicant entered institutional care are exempt.

The caretaker-child exemption is the most commonly invoked of these. Under 42 USC § 1396p(c)(2)(A)(iv), a transfer of the home to an adult child who lived in the home for at least two years immediately before the applicant entered institutional care, and who provided care that delayed the applicant's institutionalization, is exempt. The exemption requires documentation of the residence (utility bills, voter registration, tax returns showing the address) and of the care (medical records, physician statements, contemporaneous notes).

The caretaker-child exemption is heavily documented because it is heavily scrutinized. We assemble the documentation in advance: a letter from the applicant's primary care physician describing the care that was provided and the institutionalization that was delayed; the child's residency proof; and a written affidavit from the child describing the care arrangement. With proper documentation, the exemption is reliable.

The single most damaging move a family can make is an outright transfer of the home to one or more children without a retained interest. The transfer triggers a transfer penalty if made within the 60-month look-back. The home becomes the children's asset, exposed to the children's creditors, divorces, judgments, and tax liens. The applicant loses any legal right to occupy the home — relying instead on the children's continued willingness. The basis steps to the children's basis under IRC § 1015, generating large capital gains tax exposure when the children eventually sell.

We routinely see outright transfers made without legal advice, often as a generalized 'put the house in the kids' name' decision after a parent receives a diagnosis or a family member's nursing-home cost becomes salient. The fix, once made, ranges from difficult to impossible. The transfer cannot be unwound without consideration (and a buy-back creates its own tax and Medicaid issues). The basis cannot be reset. The creditor exposure cannot be undone retroactively.

If the family is determined to transfer the home to children, the MAPT or life estate deed accomplishes the same protective purpose with substantially better tax and Medicaid outcomes. A 30-minute consultation before the transfer is the best money the family will ever spend.