For many aging individuals, the possibility of paying for long-term care in a nursing home is a looming concern. One option to pay for long-term care is a Life Estate Deed to transfer ownership of the family home while retaining lifetime rights. However, this can create issues with Medicaid eligibility and recovery. In such cases, a Lady Bird Deed (Enhanced Life Estate Deed) may provide a solution. Let’s explore the benefits and limitations of Lady Bird Deeds in North Carolina to prepare for your future.

What is a Life Estate Deed? Why Would I Use One?

The eligibility application process is need-based when you apply for Medicaid for long-term care expenses. However, Medicaid usually excludes the primary residence from counting against eligibility unless there is more than $688k equity (in 2023).

The primary residence will usually not count against your eligibility for long-term care coverage as long as you check the box you intend to return home (even if that is not practical). 

But there is a bigger problem than eligibility when applying for Medicaid benefits while owning a primary home! Let’s consider that issue next.

Medicaid Estate Recovery (MERP) 

After a homeowner passes away, the state of North Carolina looks to recover the monies spent on long-term care.

Because Medicaid Recovery attaches to the decedent’s estate as a creditor, the estate can face needing to pay all of the long-term care expenses back to NC’s Medicaid Estate Recovery program. Many estates must sell the family home to pay back the funds.

However, case law gives a solution to paying back the Medicaid monies with the estate after death. Owning property as joint owners with the right of survivorship (JTWROS) can be a solution.

With JTWROS, if one of the owners dies, the creditors of the deceased owner aren’t able to attach to the real estate to get paid! 

Real estate owned as joint tenants with the right of survivorship (JTWROS) keeps the estate safe from MERP payback. There is no need to sell the home to pay the creditors! Medicaid currently accepts this as valid law. 

The lifetime estate deed is a relatively minor adjustment that potentially saves your family hundreds of thousands of dollars in government reimbursement costs.

Life Estate Deed to Avoid MERP in North Carolina

Life Estate deeds can help your estate avoid repayment of Medicaid expenses.

You can work with an estate planning attorney to set life estate deeds up and avoid paying MERP by conveying 1% of the home to an adult child. However, this deed must include the owner designation JTWROS or “joint tenants with a right of survivorship.”

2 Ways to Create the Life Estate Deed:

  1. You may give the 1% home value as a gift and incur a Medicaid penalty period.
  2. You may sell the 1% interest to the adult child. In this case, according to property tax records, the adult child pays the homeowner 1% of the home’s tax value.

However, there are issues with this potential solution. Such deeds can’t help with Medicaid eligibility if the primary home is worth more than the limit. They also can’t help with eligibility if your parent owns a second home.

Is There Medicaid Eligibility Even with Additional Property?

One thing that has gotten attention recently is the use of 1% JTWROS on non-primary residence property.  

Many individuals need long-term care without realizing the astronomical cost of it all. While Medicaid may consider the primary home exempt from the eligibility requirements, the second or vacation home may need other provisions to avoid a Medicaid spend down.

When you are ready to qualify for Medicaid eligibility for long-term care, owning too much equity in assets disqualifies you. In this case, you may need to spend down additional assets on medical equipment and nursing care until your assets fall below the eligibility limits.

The NC Medicaid Manual has defined property owned by multiple people as an exception for eligibility purposes. In addition to the primary residence exception, many DSS agencies and practitioners interpret JTWROS property as an exception. 

However, it has become more apparent recently that North Carolina is not taking that approach.

As currently worded, JTWROS does not fit the definition for a second home or a primary home above the limits. So for properties other than qualifying primary residences, you need a different solution.

Medicaid Ineligibility with Additional Property

A traditional life estate deed transfers a portion of the property to someone while you retain the rights of a life tenant. While this may work to avoid MERP, Medicaid eligibility for benefits is another story.

Medicaid has a chart determining penalties when gifting or selling 1% of the property value. You, the homeowner, face a Medicaid valuation table to calculate the value of the gift.

Medicaid will either require that the giftee pay fair market value for the interest, or Medicaid will assess a transfer value penalty on your eligibility. The Medicaid penalty is substantially larger than 1% of the tax value!

In addition, owning a property with such deeds does not let your beneficiary attain a stepped-up basis and avoid capital gains taxes if they sell the property after you, the original owner, pass away.

Next, we’ll look at a legal solution to save a residence from a Medicaid spend-down when you want to qualify for need-based Medicaid benefits, even with the additional property above eligibility standards.

What is a Lady Bird Deed (Enhanced Life Estate Deed)?

A “lady bird deed,” also called an “enhanced life estate deed,” is a life estate deed with additional features. 

Lady bird deeds remove the worries about:

  • Medicaid spend downs to qualify for long-term care benefits
  • Medicaid recovery forcing the sale of the home
  • Your desire to retain complete control of the house during your lifetime
  • Your beneficiary needing to file a gift tax return on the 1% interest
  • Your beneficiary losing a stepped-up basis and paying taxes later on for capital gains

Working with an estate planning attorney, you can address the eligibility penalty, MERP, and the capital gains tax problem with a lady bird deed.

The enhanced life estate deed (lady bird deed) allows you, the homeowner, to retain the right to sell the property and keep all the money without requiring the joinder of other owners. Unlike traditional life estate deeds, there is no gift tax or Medicaid eligibility penalty period.

With a lady bird deed, you can take back the deed you give and sell it if you desire (and the other owners don’t get any money from such a sale). So a lady bird deed differs significantly from a traditional life estate deed.

The value of your gift is worth nothing while you are living. As a result, there’s no Medicaid penalty for gifting a transfer of property with a lady bird life estate interest. Unlike a standard life estate deed, Lady bird deeds give the life estate holder full control.

Another benefit of a Lady Bird deed is that it allows you to maintain control over your property during your lifetime. For example, you can sell the property or change the beneficiaries named in the deed without needing the beneficiaries’ consent.

Drawbacks to Lady Bird Deeds

The main drawback to the ladybird deed is the ability to use the home’s equity. Property owners often have trouble finding title insurance companies or lenders to create an enhanced life estate deed. Often, you must find a specialized lender.

One drawback of the lady bird deed solution is that Medicaid helps pay for skilled-level nursing care. However, if you need a lower level of care, like assisted living, you may need to spend your resources for your care without government assistance. You may need to sell your home to fund your care or obtain equity lines/reverse mortgages in these situations. 

And, once you convert real estate to cash, it’s much more difficult to protect without significant tradeoffs. 

Another Benefit to Lady Bird Deeds

A Lady Bird deed, also known as an enhanced life estate deed, is a legal document allowing you to transfer ownership of your North Carolina property to your beneficiaries without probate after your death. Here’s how it works:

When you create a Lady Bird deed, you retain ownership interest as a life tenant of the property during your lifetime. This means you can still sell, mortgage, or rent it out.

However, upon the death of the original property owner, the real property transfers automatically to the named beneficiaries without the need for probate court intervention. The property automatically transfers quickly and easily because the Lady Bird deed supersedes any contrary provisions in their will.

And lady bird deeds also help your estate avoid probate court. Probate court is a costly and often long court-supervised settling of your estate. 

But to avoid probate with a lady bird deed, you must follow specific legal requirements in North Carolina. You must have:

  • The mental capacity to make a deed
  • The deed must be in writing and signed by them
  • Recording of the deed with the county register of deeds where the property is located.

Talk with Our Experienced Estate Planning Attorneys

At Hopler, Wilms, and Hanna, we can provide invaluable guidance in navigating the intricacies of Medicaid and long-term care planning with deeds, ensuring that your individual goals are met while complying with all legal requirements.

Medicaid planning involves a complex set of rules and regulations to protect assets while qualifying for Medicaid benefits. Our experienced attorneys carefully consider your unique circumstances and the potential impact of any actions on your Medicaid eligibility.

Consulting with our qualified Medicaid planning attorneys can help you understand the legal implications of creating different types of deeds and ensure the proper execution of these crucial legal documents.

Whether you need to draw up a life estate, enhanced life estate (lady bird deed), or need transfer on death deeds to plan for the future, we are happy to discuss your needs and help you make the necessary plans to ensure the best future for yourself and your loved ones. 

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