An applicant must have limited assets to be eligible for Medicaid. In most cases, owning a home will not disqualify the applicant. In order to keep the home in the family and not lose equity in it to the state of Texas upon the Medicaid recipient’s death, a Transfer on Death deed will be required.
Medicaid’s 5-Year Lookback Rule
When applying for Medicaid, applicants must disclose all transfers of assets made within the previous 5 years. The purpose of this rule is to disqualify applicants who give away all their wealth in order to impoverish themselves to become Medicaid eligible.
In short, making a gift of the home (and any other assets) might keep the property in the family, but it can disqualify the donor from receiving Medicaid.
Medicaid Reimbursement
In Texas, Medicaid recipients must reimburse the state of Texas out of their estates when they die. If the recipient’s home passes through his estate, it will be subject to the state’s claim for reimbursement.
Section 373.203(a) of Title 1 of the Texas Administrative Code expressly limits Medicaid reimbursement to estates as follows:
The Medicaid Estate Recovery Program (MERP) may file or present a: Class 7 probate claim under §298, Claims Against Estates of Decedents, Texas Probate Code, against the estate of deceased Medicaid recipients in accordance with the priorities contained in §322, Classification of Claims against Estates of Decedents, Texas Probate Code.
Notably, if the home is not part of the recipient’s estate when he dies, it will not be subject to reimbursement. To avoid the home being part of his estate, the recipient can make a gift of it, but as stated above, it can result in ineligibility for Medicaid.
In any event, now it is clear that the task at hand is to save the equity in the home by insuring it passes to family members outside of the Medicaid recipients estate and in a manner that will not disqualify him from receiving Medicaid or other public benefits.
This can be done via a non-probate transfer.
Probate vs. Non-probate Transfers
When a person dies, his estate will consist of all assets owned at the time of death, except assets which are transferred outside of the person’s estate.
For example, life insurance which is payable to a beneficiary upon the insured’s death passes outside of the insured’s estate. Likewise, bank accounts set up as “pay on death” (POD) accounts to named beneficiaries also pass outside of the account-holder’s estate.
These types of transfers are known as “non-probate transfers.” There are many other types of non-probate transfers, and this article does not attempt to list all of them. The main purpose is to make a simple distinction between probate and non-probate transfers. Probate transfers are all transfers of property which occur upon the death of the owner, except for non-probate transfers. Probate transfers occur through the decedent’s estate, and as stated above, such property will be subject to the state’s claim for reimbursement.
The key takeaway is that property which passes upon death by way of a non-probate transfer is not considered to be property of the decedent’s estate.
Ladybird Deed
A type of deed called a “Ladybird deed” is one way in which Medicaid recipients try to keep their homes out of their estates. Ladybird deeds are widely used, but this does not mean they are without controversy.
On the one hand, the applicant does not want to become ineligible for having made a gift during the lookback period. On the other hand, the Ladybird deed often reserves a right of the applicant to sell or mortgage the property and keep the proceeds. This hardly sounds like anything was transferred at all – meaning it could cause inclusion of the home within the applicant’s probate estate.
Suffice it to say, the Ladybird Deed is a clever device, but there has been some degree of uncertainty as to their effectiveness.
Texas’ Solution: the Transfer on Death Deed
Chapter 114 of the Texas Estates Code was created to alleviate these concerns . It enables families to preserve their home equity by using a Transfer on Death (TOD) deed.
By giving a TOD deed, the Medicaid recipient retains all rights of ownership during his lifetime. He can sell the property. He can mortgage the property. He continues to receive all benefits of home ownership protections and property tax exemptions. He can even revoke the TOD deed.
Section 114.101 states:
During a transferor’s life, a transfer on death deed does not:
(1) affect an interest or right of the transferor or any other owner, including:
(A) the right to transfer or encumber the real property that is the subject of the deed;
(B) homestead rights in the real property, if applicable; and
(C) ad valorem tax exemptions, including exemptions for residence homestead, persons 65 years of age or older, persons with disabilities, and veterans;
(2) affect an interest or right of a transferee of the real property that is the subject of the deed, even if the transferee has actual or constructive notice of the deed;
(3) affect an interest or right of a secured or unsecured creditor or future creditor of the transferor, even if the creditor has actual or constructive notice of the deed;
(4) affect the transferor’s or designated beneficiary’s eligibility for any form of public assistance, subject to applicable federal law;
(5) constitute a transfer triggering a “due on sale” or similar clause;
(6) invoke statutory real estate notice or disclosure requirements;
(7) create a legal or equitable interest in favor of the designated beneficiary; or
(8) subject the real property to claims or process of a creditor of the designated beneficiary.
Notice that Section 114.101(4) expressly states a TOD deed will not affect the transferor’s eligibility for public benefits.
Section 114.106(b) makes clear that the property will not be considered as part of the recipient’s estate. It states:
… real property transferred at the transferor’s death by a transfer on death deed is not considered property of the probate estate for any purpose, including for purposes of Section 531.077, Government Code.
Section 531.077 of the Texas Government Code is the statute which provides that the state of Texas will seek Medicaid reimbursement from the estates of decedents. It states:
Sec. 531.077. RECOVERY OF CERTAIN ASSISTANCE. (a) The executive commissioner shall ensure that Medicaid implements 42 U.S.C. Section 1396p(b)(1).
(b) The Medicaid account is an account in the general revenue fund. Any funds recovered by implementing 42 U.S.C. Section 1396p(b)(1) shall be deposited in the Medicaid account. Money in the account may be appropriated only to fund long-term care, including community-based care and facility-based care.
As stated at the beginning of this article, Section 373.203(a) of Title 1 of the Texas Administrative Code is the rule which limits reimbursement to the recipient’s estate. As long as the property is not considered to be a part of the recipient’s estate, it will pass free from the state’s reimbursement claims.
In conclusion, every homeowner who receives Medicaid benefits should execute and file a Transfer on Death deed in order to preserve the home’s equity for his or her beneficiaries.
