MasonLaw, PC | NC Elder & Special Needs Law Attorney

  • Elder Law
  • Special Needs Law
  • Hot Topics & Info
    • 2025 Medicare Premiums, Coinsurance and Deductibles
    • 2024-2025 NC Medicaid and Special Assistance Rates
    • NC Nursing Home Medicaid Law Explained
    • 2025 Federal Benefit Rate – Federal Poverty Level
    • 2025 Veteran (VA) Pension Benefit Rates
  • About
    • Find Us – Charlotte or Asheboro
    • Who to Call
    • Bob Mason, Attorney
    • Ann Mason, Practice Manager
    • Jennifer Barbee Swift, Benefits Specialist
    • Tammy Webster, Trust Funding Specialist
    • News / Press
  • Client Portal
You are here: Home / Medicaid / Real Property Basics: Medicaid, Taxes, and Probate — CONTINUED

August 1, 2022 by bob mason 9 Comments

Real Property Basics: Medicaid, Taxes, and Probate — CONTINUED

In the last article, we looked at the general characteristics of various ways of owning real property, namely: fee simple, tenancy in common, joint tenancy with rights of survivorship, and life estates. I have “hotlinked” each property type so you can go back for a “refresher.”

Now that you have a basic understanding of ways of holding real property, understanding how those different ownership interests impact Medicaid (and how Medicaid impacts those interests —  especially if you’re interested in keeping that property) is very important. As we’ll see, the various ownership interests also have different tax impacts.

Fee Simple Ownership

Medicaid:  Unless the property owned is a residence, real property held in fee simple is countable for purposes of Medicaid eligibility. Also, even if the property is a residence, although noncountable for purposes of eligibility, the property will likely be available for estate recovery purposes.

Taxes:  If the property is a person’s principal residence, the first $250,000 of capital gain is tax free ($500,000 for a couple). If the property is a principal residence, sale of the property will likely generate taxable capital gain. You can read a bit more about capital gains taxes here.

People inheriting the property will receive “stepped up” basis equal to the value of the property on the date of the death that triggered receipt of the property. This could completely avoid capital gains tax on the kids that Mom and Dad would have paid if they had sold the property before they died (assuming the property was nonresidential). Again, you can read a bit more about capital gains taxes here.

Probate:  Unless the property is held in a trust, it will be subject to probate proceedings at death of the owner.

Tenancy in Common

Medicaid:  Not countable, BUT subject to estate recovery.

Taxes:  Same rules as fee simple ownership discussed above.

Probate:  Same rules as fee simple ownership discussed above.

Joint Tenancy with Rights of Survivorship

Medicaid:  Not countable. Currently not subject to estate recovery. According to old common law (court rulings going back many years as well as “commonly accepted” understandings of the law) joint tenancies pass free of the claims of creditors against a deceased joint tenant. There is also a 62 year-old North Carolina Supreme Court case that says that is the case. Wilson County v. Wooten, 251 N.C. 667, 670 (1960). But that’s it. The General Assembly could change this if it had the political will to do so. So, bottom line: Joint tenancies currently work to avoid estate recovery. If there is a more solid strategy available, however, I use it.

Note:  Many people avoid or minimize transfer penalties by simply giving someone a 1% joint tenancy with rights of survivorship interest. That way, they have made a very small (1%) gift subject to a transfer penalty. Or the person receiving the 1% might pay for it and avoid a transfer penalty completely.

Taxes:  Same as tenancy in common interests discussed above.

Probate:  Avoids probate.

Tenancies by the Entireties

Medicaid: Unless the real property is the residence, tenancy by the entireties property owned by the married couple will be countable. This property will need to be converted to a joint tenancy with rights of survivorship to become noncountable (perhaps by giving a child 1% and holding the other 99% as tenants by the entireties by the married couple). It’ll be a joint tenancy with respect to the 99% and 1% and the 99% held by Mom and Dad as tenants by the entireties. I know — Strange.

Life Estates

Medicaid:  Not countable for eligibility purposes and not available for estate recovery. The problem is, recall when someone sets up a life estate with real property they currently own in fee simple (or as tenancies by the entireties if owned by married parents) they are giving a remainder interest to others that is worth a certain percentage of the overall value of the property. That percentage value will be considered a Medicaid sanctioned transfer if there is a Medicaid application made within five years.

Example:  If Falstaff is 70 years old, Medicaid uses an actuarial chart that shows Falstaff’s life estate to be worth about 60% of the value of the property, and Prince Hal’s remainder interest to be worth 40% of the property value. If the property is tax assessed at $100,000, Falstaff will be treated as having made a $40,000 sanctionable transfer, which could back to haunt him if he applies for Medicaid within five years. On the other hand, Falstaff could have sold Prince Hal the remainder interest and there would be no problem.

Another problem:  If the land (or residence) subject to the life estate is sold, a portion of the proceeds will belong to the life tenant. In the example just given, Falstaff would receive 60% of the proceeds, which could be most inconvenient if he is on Medicaid.

Prince Hal
Woops. Wrong Prince Hal.

Another planning strategy:  One planning strategy that is occasionally used is for Falstaff to buy a life estate. Let’s say Prince Hal actually owns Blackacre. If Falstaff pays $60,000 for a life estate in Blackacre, he will pay fair market value so there will be no transfer penalty. Further, in North Carolina the life estate won’t be countable as an asset. But this DOES raise another issue.

The Issue:  If the life estate Falstaff purchases is in property that was “the home of another person” (that is, this is Prince Hal’s home) then Falstaff would have to live in the property for at least 12 continuous months. If he doesn’t live there 12 months or more, there will be a transfer penalty on the purchase even though he may have paid fair market value. You can thank Congress for that little gem. On the other hand, if Blackacre is not “the home of another” Falstaff should be OK.

Taxes:  If the property is sold and there are capital gains, a portion will be taxable to the life tenant and a portion will be taxable to the remainder interest holders.  If it is the life tenant’s residence being sold, however, the life tenant will get a capital gains tax break on her share, but the life tenants – pay up! If the property is never sold, the remainder interest holders receive the property with stepped up basis to fair market value as of the date of the life tenant’s death.

Probate:  Life estates avoid probate.

Lady Bird Deeds:  These are sooo early 21st century! But because folks occasionally hear about these, I’ll explain. A Lady Bird deed looks like a standard life estate deed at first glance, except that the Grantor retains the right to change his mind or give the remainder interest to someone else. “I, Falstaff, give Backacre to Prince Hal, but I retain a life estate in Blackacre and further retain the right to cancel this deed or to give the remainder interest to any other person so named.”

Would you pay Falstaff money for the remainder interest? Of course, you wouldn’t. The remainder interest is worthless because Falstaff could always change his mind. On the other hand, if Falstaff dies without changing his mind, Prince Hal will automatically take Blackacre.

In North Carolina, because the remainder interest has no value Falstaff has not made a valuable transfer and there is no penalty. Further, on his death the property should pass free of estate recovery. Lady Bird deeds have worked fine for years. They do make me a bit nervous . . . they seem just . . . too easy. There is not a shred of law to support these. We at Mason Law, PC stopped using these years ago.

Instead, I prefer to use a 99% — 1% joint tenancy deed instead. At least you have the common law and an old North Carolina Supreme Court case to rely on.

A Final Word on Trusts

As you can see, the foregoing ownership techniques pose some Medicaid drawbacks. If there is any chance property could be sold, there is the problem with a portion of the proceeds being considered owned by the potential Medicaid recipient. Some techniques pose some potential estate recovery risk. If an individual feels like she can get through five years without applying for Medicaid (either because of good health or enough other assets to cover the nursing home bill for a few years), and if she cares about the property, a trust is usually a better asset protection technique. A trust can also preserve all the tax advantages discussed above.

Yes, a trust is a bit more complicated to setup. And yes, a trust is a bit more expensive. But in the grand scheme of things, it could well be a superior solution.

You can read more about trusts here.  You can read more about Medicaid and Trusts here.

Print Friendly, PDF & Email

Filed Under: Medicaid, Reader Favorites, Real Property, Tax Issues Tagged With: Medicaid, Real Property, Taxes

Comments

  1. Monroe Pannell says

    August 1, 2022 at 9:20 AM

    Bob good stuff as usual. I have printed copy and put in my Medicaid notebook that I have kept for years.

    Regarding JTWROS-if Jr. dies first have we lost the benefit of the device? Or maybe Jr. and his sister Jane each buy a 1/2 percent JTWROS from mom and JR. dies first so Jr.’s family gets left out but sister Jane walks away with it all at mom’s death.

    Reply
    • bob mason says

      August 1, 2022 at 9:26 AM

      Correct, Monroe. Sister walks away with all. If she is nice she might share with Junior’s kids, but if she is not nice . . . . That’s yet another reason I tried to avoid JTWROS unless it is “late in the game” (someone is in, or about to go into, a nursing home) and I just can’t come up with any better alternatives.

      Reply
      • Ric Buckner says

        March 27, 2024 at 6:01 PM

        Bob, I agree with Monroe’s concern, and with your response. Although nobody wants to even think about a child dying before the parent, it of course happens all the time, and more often I believe even after parent dies the children by inertia continue to hold their new 100% interest as JTWRS, which I believe no adult siblings really ever want.

        I am attempting to avoid those issues and I would appreciate your input.

        My approach basically modifies your comment “It’ll be a joint tenancy with respect to the 99% and 1% and the 99% held by Mom and Dad as tenants by the entireties” to “It’ll be a joint tenancy with respect to the 99% and 1%, with the 99% held by Mom and Dad as tenants by the entireties” and the 1% held by the children as tenants in common.

        Your thoughts?

        Best, Ric Buckner, Rockingham

        Reply
        • bob mason says

          March 27, 2024 at 8:12 PM

          We’re saying the same thing. You’re replacing my “and” after 99% with “,with.”

          Reply
          • Ric Buckner says

            March 29, 2024 at 12:38 PM

            Yes, my email was confusing, and I apologize.

            What I meant to highlight was what I added at the end of your sentence: “and the 1% held by the children as tenants in common.”

          • bob mason says

            March 29, 2024 at 1:21 PM

            I don’t think that’ll work. If Mom and Dad have a 99% JTRS interest, it is a joint and survivorship with whom? If the children’s share is being as a tenancy-in-common and one dies, then you have a tenancy-in-common between the surviving children and the deceased’s heirs. It would be like my owning a piece of real property as tenants in common and making it a joint tenancy with rights of survivorship in myself. I realize you’re trying to protect against the miscreant child who has a joint tenancy in the whole and who decides to move in. Hopefully, by the end of the client interview I’ll have a good idea of whether everyone is playing on the same team and whether there are some troublesome family members.

            The same situation has come up in the case of Mom going to nursing home, and she is sitting on, say, a few hundred thou. Turns out one of the kids is on Social Security Disability (for the benefit of general readers: Not a means tested benefit and no transfer penalties like SSI). So, EVERYONE thinks it is a great idea for Mom to transfer everything to Bro, who OF COURSE will share with his Sibs. Then it turns out Bro develops amnesia and “forgets” his promise to the Sibs. They then ask me, “What can we do?” And I tell them, “You misjudged him. Tell him to have a happy life . . . without his Sibs in it.”

      • Ric Buckner says

        March 29, 2024 at 12:34 PM

        Bob, I agree with Monroe’s concern, and with your response. Although nobody wants to even think about a child dying before the parent, it of course happens all the time, and even more often after parent dies the children continue by inertia to hold their new 100% interest as JTWRS, which I believe no grown siblings ever really want.

        I am attempting to avoid it and I would appreciate your input.

        My approach basically modifies your comment “It’ll be a joint tenancy with respect to the 99% and 1% and the 99% held by Mom and Dad as tenants by the entireties” to “It’ll be a joint tenancy with respect to the 99% and 1%, with the 99% held by Mom and Dad as tenants by the entireties” and the 1% held by the children as tenants in common.

        Your thoughts?

        Best, Ric Buckner, Rockingham

        Reply
  2. Ric Buckner says

    March 27, 2024 at 6:19 PM

    Bob, one other concern of mine about the “99% — 1% joint tenancy deed”.

    Does your deed also reserve a life estate? I am concerned that otherwise some difficult child will move into the parents’ home during their lifetimes and refuse to leave, since all joint tenants have a right to possession.

    But I am concerned that reserving a life estate effectively renders the JTWRS meaningless (as to their 99%).

    Reply
    • bob mason says

      March 27, 2024 at 8:15 PM

      No, the joint tenancy deed doesn’t reserve a life estate. I don’t know how that would even be possible. As far as recalcitrant kid moving in, I guess it is up to the attorney to sort out family dynamics when considering planning steps.

      Reply

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Now Serving Charlotte

704.276.6446

Also the Triad from Asheboro

336.610.6000

Find Us

Get A Free NC Medicaid Nursing Home Rules Booklet

Mason Law Booklet Offer

Great tips from an expert!

Download Now

About Bob Mason

Bob Mason, Elder Law & Special Needs LawRobert A. Mason, JD, CELA, CAP, is owner of Mason Law, PC, of Charlotte and Asheboro, North Carolina, a law firm devoted exclusively to legal issues involving the elderly and the disabled. Read More >>

Best Lawyers -
Robert A. Mason
Rated by Super Lawyers


loading ...

Browse Articles Here!

Or Search On A Topic

News

Mason Named 2023 Triad Lawyer of the Year in Elder Law

ASHEBORO, NC — Best Lawyers® has announced that … [Read More...]

Mason named to 2022 Super Lawyers

Robert A. Mason named to Super Lawyers ASHEBORO, … [Read More...]

Mason one of seven N.C. elder law attorneys named to Super Lawyers

ASHEBORO, NC — Jan. 27, 2021: Elder law and … [Read More...]

Reader Favorites

That's a "no-no" if you want to avoid a Medicaid transfer penalty

Medicaid Transfer Penalty: Avoid This Costly Mistake

The Medicaid transfer penalty is the most common issue we deal with when we … [Read More...]

Stern woman

Valid POA MUST Be Honored

Based on multiple true events. It’s maddening! Chelsea is stuck! Her … [Read More...]

Eye roll emoji

Corporate Transparency Act Now ON HOLD

The CTA is ON HOLD! Sort of. Thursday evening FinCEN announced its … [Read More...]

  • Corporate Transparency Act Update: IT’S BACK!
  • Is Your Power of Attorney a Flabby Weakling?
  • Yet Another CTA Update: #3

© 2025 MASONLAW, PC | NC ELDER & SPECIAL NEEDS LAW ATTORNEY