MEDICAID & MORTGAGES
How many times have you heard the advice, “Pay off your mortgage before retirement”? Many couples are very proud of the day they finally don’t have a mortgage hanging over their head. There is much to be admired about being debt free. However, debt is not always bad. Surprisingly, when facing long term care, sometimes having a mortgage can even help!
When one spouse becomes ill and must begin receiving long term care, the healthy spouse at home may wonder how they will afford to pay for their spouse’s nursing home without losing everything. The answer for most is Medicaid. Medicaid has complicated rules that must be satisfied in order to qualify, and sometimes navigating them can seem counter intuitive. Sometimes taking out an equity loan on the house can save you thousands of dollars.
This plan only works in a very specific, but not uncommon situation. This plan may most benefit a married couple, where one spouse is ill and needs long term care, but the other spouse is staying in the family home, and the bulk of that couples’ net worth is invested in the house.
SPOUSAL QUALIFYING ASSETS FOR MEDICAID
First a brief review on what happens when one spouse needs to qualify for Medicaid (see article Basics of Medicaid for more detail).
Medicaid is a means tested program, which means when determining eligibility it looks at an individual’s assets. There are two ways of classifying assets for Medicaid; exempt assets and countable assets. Exempt assets mean that Medicaid does not count them when determining eligibility. These assets are; the residential house, one car, all personal items, and prepaid funerals. All other assets are considered countable assets.
In order to see if the countable assets are low enough to qualify, Medicaid looks at the value of the assets on two different dates; the snapshot date, and the date Medicaid is applied for.
The snapshot date is the first day that the ill spouse is institutionalized for more than thirty consecutive days. If this date has not yet occurred, the snapshot date is the first date Medicaid was applied for. There is only one snapshot date. If a snapshot date has not already been established, applying for Medicaid while one is over assets, will immediately establish a snapshot date, even though the first application will get rejected. Once the snapshot date is established, then the couple can reapply in the future once assets have been spent down to a qualifying level.
On the snapshot date a “picture” is taken of the value of the countable assets. It does not matter whose name the assets are titled in. In most instances, the community spouse gets to keep half, and the rest must be spent down to $2,000 in order for the ill spouse to qualify for Medicaid. For example, if a couple has $100,000 on the snapshot date, the community spouse gets to keep $50,000 and the ill spouse must spend $48,000 to spend his side down to $2,000 to qualify for Medicaid.
There are minimum and maximum restrictions on this rule. In 2019, the community spouse is allowed to keep a minimum of $25,284 and a maximum of $126,420. This means, if the couple has only $30,000 in countable assets, the community spouse gets to keep $25,284 and the ill spouse must spend only $2,716 to get below the $2,000. However, if a couple has $300,000 in countable assets, the community spouse only gets to keep the maximum of $126,420 and the institutionalized spouse has to spend down $171,580 to reach a qualifying level of $2,000 or less.
MORTGAGES, CREDIT AND DEBT
With a better idea of how Medicaid works for couples, we can now look at how debt comes into play. For the most part, Medicaid does not consider debt when looking at eligibility. Debts are not counted against you.
It does not matter if you have a $5,000 bank account and a $3,000 credit card bill, as far as Medicaid is concerned, you do not qualify because you have $5,000 in countable assets, which is too high. However, you are allowed to spend down your assets by paying your debts. So if you paid off your $3,000 credit card bill, leaving $2,000 in the bank, you would qualify for Medicaid. Obviously the nursing home would prefer the money be spent paying for care, which is an option, but an individual applying for Medicaid can pay off any debts he likes so long as they are his debts (cannot pay off student loans for a grandchild, for example).
This means that if a couple is looking to spend down money to qualify for Medicaid, a large loan like a mortgage can be a very quick way to spend down money to get a person qualified for Medicaid. If a person doesn’t have a mortgage, they may even want to take out an equity loan on the home to increase the amount of countable assets before the snapshot date, knowing that when the time comes to spend that money down, they will be able to repay it.
Let’s use an example to illustrate how a loan on the house can sometimes be an advantage. There are two couples that live next to each other, and have a similar financial picture.
Dwight and Angela have a house and a bank account with a net worth of $360,000. They have a house worth $300,000 and no mortgage, and have a bank account worth $60,000. Their neighbors Jim and Pam also have a house and a bank account with a net worth of $360,000. They have a house worth $300,000, but have taken out a loan with $150,000 of the equity which they did not spend, but instead added it to their $60,000 bank account. The bank account is now worth $210,000.
Both Dwight and Jim need to go into a nursing home. The wives go to apply for Medicaid for their spouses to help pay for their husbands’ care.
Dwight & Angela
The house is an exempt asset, but on the snapshot date Angela and Dwight had $60,000 in countable assets. Angela gets to keep $30,000 and they need to find a way to spend down $28,000 to get Dwight qualified for Medicaid (he gets to keep $2,000). She spends the money down on Dwight’s nursing home care for three months, and then he qualifies for Medicaid. At the end of the day, the couple has a net worth of $332,000 and Dwight is receiving Medicaid.
Jim & Pam
The house is an exempt asset, and on the snapshot date Jim and Pam had $210,000 in countable assets. Pam gets to keep $105,000 and they need to spend down $103,000 for Jim to be qualified for Medicaid (he gets to keep $2,000). They spend the whole $103,000 on repaying the equity loan they have on the house, bringing it down to just $45,000 owed on the house. Pam may also be able to apply to Medicaid to keep an extra part of Jim’s income to help with the mortgage payment. The couple still has a net worth of $360,000 and Jim can begin receiving Medicaid immediately.
Obviously Jim & Pam are in a much better situation than Dwight & Angela at the end of the day.
WARNINGS & CAVEATS
This plan does not benefit single people.
This plan does not benefit married couples who already have over $250,000 in countable assets outside of the house.
This plan only works if the mortgage is taken out before the snapshot date. Once the snapshot date is established it cannot be changed. Ideally on the snapshot date, assets are as close to $253,000 as possible, though this is not always within the individual’s control.
Remember, this has to be an equity loan, not just a line of credit.
In order for the plan to work, it’s important to keep the money safe once the equity is pulled out of the house. This means, you should NOT:
- Invest in high risk options, like the stock market. (choose something risk free)
- Gift the money. (NEVER gift money when considering Medicaid without consulting an attorney)
- Loan the money out.
- Go on a spending spree. (Just because the money can be accessed does not mean it should.)
- Tie the money up by purchasing an annuity, or a long term cd or something else you can’t access when you need it.
This is just one of many strategies that can help a couple facing long term care. Everyone’s situation is unique and therefore everyone’s estate plan is different. The laws change and are often nuanced. Consult with a specialist attorney who can help you find the right plan for you.