Can't I Just Deed the House to My Child and Apply for Medicaid?

It is certainly possible for a parent to sign a deed transferring complete title of the parent's home to a child. However, the parent should be very sure he or she understands the ramifications of signing such a deed.

First of all, this is a taxable gift. However, in most states there is no state gift tax to worry about, and if your total gifts during life will never exceed $1 million, you'll have no federal gift tax to worry about, either.

Second, and more importantly, you no longer own the house. That means that you're at the mercy of your child who now owns it. But you're not worried about your child kicking you out, you say? That's not necessarily the issue. What you should be concerned about is if your child gets sued because of a business deal gone bad or a car crash where the injuries exceed your child's auto insurance policy limits. You should also be concerned if your child gets divorced, with the divorce rate being as high as it is. You see, although even after you've signed the deed you may still think of your home as "your" house, it is now really an asset of your child's, and those creditors will have no problem foreclosing on "your" house and booting you out.

Third, there is the impact on Medicaid eligibility. If you or your spouse deed your home to one or more of your children, that transfer will cause a period of disqualification from Medicaid. This is called a "penalty period." The length of the penalty period depends on the value of your house. The formula the states use is this: amount of gift [divided by] penalty divisor = # of months penalty. The "penalty divisor" is a figure set by each state, roughly equivalent to the average cost of a nursing home in your state.

Example: You deed your house worth $150,000 when your state's "penalty divisor" is $5,000. $150,000/$5,000 = 30. Thus, if you applied for Medicaid the next day--or anytime prior to five years from now--you would be disqualified for the next 30 months. The only way around that is if you waited at least 5 years and then applied for Medicaid. At that point, the gift of the house would be ignored, since it is outside of the 5-year "lookback" period.

If in the above example your house were worth $350,000, the penalty period increases to 70 months! Of course, in that case, you would definitely want to wait to apply for Medicaid until after the expiration of the 5-year lookback period. If for some reason you forgot and actually did apply before the 5 years were up, you would be faced with a 70-month penalty period. There is no upper limit to the length of the penalty.

There are exceptions to the above rule that allow a transfer of the house without it causing a penalty. These exceptions will be discussed in future blogs. Stay tuned!