You or your parent may want to live at home as long as possible. But, that sometimes isn’t financially feasible due to the cost of in-home care. Fortunately, there’s a planning option in situations like these. It’s called a “reverse mortgage.” It’s essentially when a loan is taken out against the equity in the home to pay those expenses. Most importantly, this loan doesn’t have to be paid back until certain things happen (i.e. the owner of the house passes away).
While reverse mortgages can be a helpful planning tool, they also can create significant complexity later in life. If you or your parent is no longer able to stay at home and needs care in an assisted living facility or nursing home, you’ll likely need to apply for Medicaid. The Medicaid rules on reverse mortgages are quite complicated. These are the most important rules to keep in mind:
- The proceeds of a reverse mortgage can be an exempt asset. The Medicaid rules allow for the funds you receive from a reverse mortgage to be an excluded asset. In other words, the monies available from a reverse mortgage can be protected and don’t have to be spent down to qualify for Medicaid. However, there are some important rules that have to be followed. The first is that the reverse mortgage must be secured by a lien against the house. Second, the funds from the reverse mortgage must be deposited and kept in a non-commingled account (i.e. not mixed with other money). Finally, the proceeds can’t be invested in a CD.
- Paying back a reverse mortgage may be divestment. Medicaid has taken the position that paying back in whole or in part a reverse mortgage can be divestment. This means that the payment will be treated as if the funds have been given away and this will delay when Medicaid benefits start. For example, if you or your parent has $42,000 of cash assets left, use $40,000 to pay down the reverse mortgage to qualify for Medicaid, that $40,000 payment may result in four months of not receiving benefits. This means that the cost of care for that four month period (i.e.$44,000-$52,000 in a nursing home setting) won’t be covered by Medicaid. If you or your parent only has $2,000 left (in addition to the house), this will create a significant financial hardship.
- Determine when a reverse mortgage can be paid down or paid off. As I mentioned above, reverse mortgages typically don’t require a payment. This allows you to use the funds as opposed to having to pay them back to the lender. On the other hand, this creates problems if you or your parent has cash left and wants to use it to pay down the reverse mortgage to qualify for Medicaid (as opposed to using those remaining funds for the expense of nursing home care). The loan and reverse mortgage documents need to be carefully reviewed to determine if a payment obligation can be legally triggered. If this can be done, the payment won’t be considered divestment and delay the start of Medicaid benefits. This will allow the remaining funds to increase the equity in the house and be protected from Medicaid.
