Dear Mr. Premack: My mother, a healthy widow in her early 70's,
is retiring to a house she recently built. She will sell her current home
and pay down 60% of the mortgage with the proceeds. My husband and I (I'm
an only child) plan on taking over the remaining balance, putting the
house solely in our names. My mother only has social security (less that
$2000 a month) as her income. Once the house will be in our names, could
the house be subject to the Medicaid look-back period or other recovery
action should she need Medicaid in the future? – DN
mortgage legally affects 1) how you take ownership and affects 2) how your
mother might qualify for Medicaid in the future. It sounds like your
mother already purchased the land, already borrowed the money and already
built the new house. She will sell her prior home, and wants to use the
net proceeds to pay down the principal balance of her mortgage. Then you
and your husband would like to take over the payments and take over
Her current mortgage is a lien against your mother’s
new house. Take a close look at the deed of trust and the promissory note
(which are the legal documents she signed to obtain the funds). It is very
likely that they contain a “due on sale” provision in which she agreed
that she will not transfer ownership unless 1) the mortgage is paid in
full or 2) the mortgage company approves the transfer in advance.
Thus, before you can become owners you must pay off her current loan with
a refinance, or you must get permission to take over her current loan. If
you were the mortgage company (and thus care only about your profits) what
would you do?
Look at two scenarios. First: assume your mother
owes $100,000 on a mortgage at 5% for 30 years. If after a year of making
payments she uses $60,000 cash to reduce the loan balance to $38,500, then
she’ll only have 12 more years until the loan is retired. She will have
repaid the $100,000 plus interest of about $25,000. Second, assume you
must refinance the $38,500 balance over 30 years at 5%. Over those 30
years you pay about $36,000 interest. Including the first year of her
original loan, there will have been 31 years of payments totaling $100,000
principal and about $41,000 interest. Clearly the bank makes more money if
it forces a refinance than if it allows you to assume your mother’s note.
When you buy the house and land from your mother for the balance
of her loan, she is obviously gifting to you the rest of its fair market
value. You become legal owners when she signs a deed giving you title and
you sign a new deed of trust and promissory note to your mortgage company.
She must report the gift to the IRS, but will likely elect to use part of
her lifetime gift tax exemption to avoid paying tax on the gift.
Under current Medicaid law, if your mother goes to a nursing facility and
applies for Medicaid benefits, she must show that 1) she is 65+, 2) her
medical condition requires that level of health care, 3) her monthly
income is less than $2022, 4) her countable assets are less than $2000 and
5) she has not gifted away anything of value during the look-back period.
The gift of the house would legally be subject to Medicaid’s
look-back period about which you asked. Be aware that the look-back period
may be a moving target. It is 5 years now, but was formerly 3 years.
Congress could lengthen it again, and your mother would be subject to the
new longer look-back period in effect on the date she applies for
If your mother stays at home until after the look-back
period expires, the gift of the house will not cause a problem. But if she
applies for Medicaid during the look-back period then she will be
disqualified from receiving Medicaid assistance. The length of the
disqualification will depend on the actual value of the house which was
transferred to you. There is no recovery action by Medicaid if she did not
own the house on the date she applied for benefits. She should not take
any legal action before she meets with a Certified Elder Law Attorney to
discuss her exact situation to get other ideas and options that may work
for her proper estate and Medicaid planning.