Question: One of my friends lives in a nursing home. Her children are worried the nursing home will take their mother’s home to pay for her care. This gets me thinking about my home. What are my options to ensure my children, and not the nursing home, get my home after I pass away?

Answer: On average, Medicaid spends around $8,000 per month for a resident’s long term care. After two years in a nursing home, a resident may owe as much as $192,000. So, you are wise to investigate your options to protect your home. By transferring your home to a Medicaid avoidance trust, you can place your home beyond the reach of Medicaid’s cost recovery program. How does a Medicaid avoidance trust work?

As my readers know, a trust is nothing more than a “rule book” governing the manner in which you own an asset. So, rather than owning the home outright, you own it subject to the rules of the trust. You are the trustee and the beneficiary during your lifetime. A Medicaid avoidance trust employs three main rules that restrict your rights as a home owner.

When Medicaid reviews your assets, it cannot consider a home owned by this trust as your outright asset. Thus it will be unable to use the home to recover its costs. The three main trust rules are discussed below.

Irrevocability – An irrevocable trust cannot be changed after it is created. It shows Medicaid you are fully committed to the transfer.

Income Only – The trust prevents your ability to access the principal of assets it owns. Here is an example of this “lockbox” theory when applied to money. If you transfer a large cash account to the trust, you lock away the principal and can only withdraw the interest earned by the account. When you apply this concept to real estate, there is less sacrifice.

Practically speaking, your inability to access the principal of real estate, denies you the ability to pull equity out of your home through a refinance or reverse mortgage. You may still sell the home, and use the proceeds to buy another home. However, if you plan to downsize and buy a less expensive home or condo, the excess sale proceeds will be subject to the lockbox rules – similar to the cash example above.

Fortunately, there is a trap door to the lockbox. You can access any amount of principal to give a gift to a child. Once given, your child takes the cash outright and can give it back to you immediately. These gifts are allowed by the Medicaid rules and will not incur a gift tax liability until you exceed your exemption of one million during your lifetime.

Five year look back period – The folks at Medicaid know that if allowed, people would transfer their home to such trusts moments before entering a nursing home. Accordingly, they instituted a 5 year look back period, during which they can consider trust assets as still owned by the individual and thus available to reach.

These trusts provide great opportunity for clients to protect their assets from this risk and ensure that their kids or loved ones will receive as much inheritance as possible. However, a consultation will allow you and your children to explore these details a lot further.

Attorney James Haroutunian’s practice focuses on estate planning in Billerica at 630 Boston Road. Contact him with to schedule a complimentary consultation at 978-671-0711 or email him at james@hlawoffice.com. Home visits are available if needed