Medicaid Planning Question: Will Paying Off Parents’ Mortgage Affect Their Medicaid Eligibility?

Question:

If children buy their parents out of a reverse mortgage, is that a transfer of an asset for less than fair market value, which would negatively affect Medicaid eligibility? In this instance the house could potentially sell for $600,000 to $700,000 on the market, but the buyout of the reverse mortgage would be roughly $400,000.

Answer:

It depends on what you mean by “buy out.” If the children pay off the reverse mortgage and in effect become the bank by taking on a mortgage of equal value, that’s not a transfer and would not be a problem in terms of Medicaid.

However, if instead the children paid off the mortgage and became owners of the property, that would be a transfer resulting in Medicaid ineligibility of up to five years. One potentially good result of the going the first route – taking over the mortgage with the parents retaining ownership of the property – is that interest will continue to accrue. This means that the longer the parents live, the larger their debt to their children. This growing mortgage would take precedence over any Medicaid estate recovery claim.

But beware of hidden tax consequences – this growth in the mortgage would also be considered income to the children when it’s paid off. Before taking any action, it is a good idea to talk to an elder law attorney.