QMC

How Does a Reverse Mortgage Impact Medicaid Eligibility

A reverse mortgage loan is designed for adults age 62 or older to convert a portion of their home equity into cash, with the real estate serving as security for the loan; reverse mortgages are only available to Americans in this age range. This type of loan allows individuals and couples to remain in their home and use their equity to supplement some of the homeowner’s living expenses.

A reverse mortgage is often used by retired families to supplement their living expenses. For those considering this estate planning product, it’s important to understand how it can affect Medicaid eligibility. Reverse mortgages should only be considered in light of Medicaid eligibility for families facing the possibility of long term care in a nursing home in the near of medium future.

Unlike a regular mortgage where homeowners pay a lender mortgage payments each month for their home, under a reverse mortgage the lender pays the homeowners. These payments are advanced payments on the owner’s home equity, which are not repaid as long as the family continues living in the home. If the family sells the home or moves out, however, repayment of the loan, usually in a lump sum (not monthly payments), is due. Even if they pass away, the loan must be repaid by their spouse or estate, even due out of probate. In many cases, this involves selling the home in order to repay the reverse mortgage loan, or even foreclosure.

Grants of reverse mortgage benefits can come in a couple of different ways. For some, a lump sum payment is advanced to the family. In others, the family is granted a line of credit to draw from as expenses are needed.

Like other estate planning moves, a reverse mortgage can have a big impact on a person’s eligibility for Medicaid benefits. Although the payments from a reverse mortgage are not considered income in most states, if that money is left unspent within the month received, the remaining balance will be carried into the next month, thus increasing the individual’s total countable assets. In certain states, the reverse mortgage payments may be considered assets in the month they are received. The bottom line is that countable assets can be increased through a reverse mortgage (thus increasing spend down), through the conversion an exempt asset (a primary residence) into a non-exempt asset (cash).

Single clients, in fact, have very little to gain, Medicaid benefits-wise, by pursuing a reverse mortgage. Since a single person must always remain below a static Medicaid asset limit, any unspent payments from a reverse mortgage will affect their eligibility and increase spend down. Additionally, if the single person/borrower leaves their home and moves into nursing home care or into assisted living, they would either not qualify for a reverse mortgage or be forced to pay back an existing reverse mortgage.

Married couples, however, can benefit from a reverse mortgage as long as the payments are made payable to the community spouse. However, if payments are made to both spouses, the institutionalized spouse/Medicaid applicant may exceed their Medicaid asset limit and thus not qualifying for Medicaid long-term care benefits.

Married couples who want to use a reverse mortgage must wait to do so until after the institutionalized spouse gains eligibility for Medicaid. The community spouse must be within the Medicaid asset limitations at the time of application, but the state Medicaid agency only reviews the institutionalized spouse’s assets going forward. Thus, once they become eligible for benefits, any reverse mortgage payments to the community spouse will not affect their spouse’s Medicaid eligibility.

Finally, note that reverse mortgage equity liquidations rarely fit within gifting strategies. The conversion of an exempt asset into a non-exempt asset is not advisable, and the gifting can and will invoke the five year Look-Back period.

Reverse mortgages can be used, particularly by married couples, to help bolster low income while still planning for eventual Medicaid and complying with all Medicaid rules. If one of the household members may be a Medicaid applicant within the foreseeable future, families should investigate how to coordinate the reverse mortgage with the future possible need for Medicaid.

If you are looking to qualify for Medicaid benefits and you’d like to understand your options, we can help.

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