Medicaid Home Exemption May Become Limited Under New Law

President Bush has included a provision in his 2008 Budget Proposal that would eliminate the ability of states to exempt more than $500,000 of a home's equity.

Prior to the enactment of the Deficit Reduction Act of 2005 (DRA) on February 8, 2006, a single or married individual applying for Medicaid nursing home coverage could exclude a house of unlimited value. Since that law was passed, however, a limit of $500,000 was imposed: if a single individual's home equity exceeded $500,000, even by one dollar, the entire value of the home would be a countable asset for Medicaid eligibility purposes. (For an individual whose spouse resides in the house, there is still no limitation on value.) However, the DRA permitted the states to increase that $500,000 limit to as much as $750,000, if they passed a state law that did so.

Under the new Budget Proposal, however, that ability of states to increase the exemption would be taken away. With modest middle class housing values in many parts of the country routinely surpassing $500,000, that $500,000 limit can be a real problem.

One suggestion of how to deal with this would be for the potential Medicaid applicant to create an irrevocable trust and deed the house into that trust. If the trust is drafted correctly, then after 5 years have passed, the house will no longer be a countable asset, regardless of its value! An additional benefit: while a house not in trust can be attached by the state after the death of the owner/Medicaid recipient, if the house is in this type of trust it cannot be attached. So, it protects the house both during life and after death!

To decide if the above trust technique will work for your situation, you will need to sit down with an experienced elder law attorney in the state where the potential Medicaid applicant lives. Because this works best when there is sufficient time for the 5-year period to run, it is best to do this as soon as possible!

A number of additional options for dealing with the home both during life and after death are discussed in my book, "How to Protect Your Family's Assets from Devastating Nursing Home Costs: Medicaid Secrets."