She Spent $80,000 Turning Her Son’s Garage Into an Apartment. Three Years Later, Medicaid Counted It as a Gift Because She Bought No Share of the House
She wrote $80,000 in checks to build herself a home next to her grandchildren, lived there three years, and never imagined a Medicaid caseworker would later treat the whole project as a gift to her son.
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Picture a widow who writes $80,000 in checks to turn her son’s garage into a small apartment. She moves in, picks the grandkids up from school and spends three years a few steps from family. Then a fall down the stairs sends her to a care facility. She seeks Medicaid coverage, and the caseworker flags the renovation as a gift.
The rule behind that flag is Medicaid’s five-year look-back. When someone seeks Medicaid coverage for long-term care, the government looks back five years from the date of the application for assets given away or transferred for less than fair market value. A transfer inside that window can cause a penalty period when Medicaid won’t pay for long-term care. Her son owns the house. Her name appears nowhere on it.
How an $80,000 Renovation Turns Into a Gift
From the state’s point of view, the money left her bank account and ended up as equity in her son’s house. If she got no ownership share, life estate, repayment right or other enforceable value, Medicaid can treat the spending as a transfer for less than fair market value. That’s the same category as handing him a check.
Medicare is federal health insurance for people 65 and older. As Suze Orman reminds listeners, “Medicare does not cover long term custodial care. Medicaid however does,” and Medicaid only steps in once a person’s countable assets are nearly gone. The nursing-home stay forces the Medicaid application, which triggers the look-back.
Why Three Years of Rent-Free Living May Not Cover It
Her time in the apartment counts for something. But the caseworker will ask whether what she received was reasonably worth $80,000. With no lease, deed or written agreement, the family has a harder time showing what she received for the $80,000. Whatever value the state decides she didn’t receive in return can become the uncompensated transfer.
The timing works against her. She paid for the work three years before applying, which puts the spending well inside the 60 months Medicaid reviews. Had the construction happened more than five years earlier, the check would have aged out. In Orman’s words, once “five years pass from that time, then Medicaid cannot go back on the money that she gave away.”
To calculate the penalty, the state divides the uncompensated amount by a penalty divisor reflecting average monthly nursing home costs. The same $80,000 buys a longer penalty in states with cheaper nursing homes. The penalty period starts only once she’s otherwise eligible and in the nursing home with assets spent down. That’s when the uncovered nursing-home bills start arriving.
A Written Life Estate Gives Her Something to Show
If the original deal had given her a properly valued life estate, she would have had a legal interest to show for some or all of the money. Federal law treats the purchase of a life estate in someone else’s home as a transfer unless the buyer lives there for at least one year after the purchase. She stayed three years.
The price still has to make sense. If she pays more than the life estate is worth, the excess can still count as a transfer. Other arrangements might include a properly structured loan or an ownership share tied to what she contributed. Either way, she has something enforceable to show for the money.
For families already stuck, a fix may still exist. A penalty can be reduced or eliminated if the gift comes back, so a son who refinances or takes out a home equity loan to repay his mother can shrink or remove the penalty. Orman’s standing advice to families facing a move to long-term care: “do not give things to the kids, do not take on single asset protection steps without consulting an elder lawyer.”
She thought she’d bought herself a place to live near her son. Medicaid sees $80,000 added to someone else’s house, with nothing of matching value coming back to her.
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Gerelyn Terzo is the author of dividend investing handbook "Dividend Investing Strategies: How to Have Your Cake & Eat It Too." A veteran financial journalist, she covers agri-finance for outlets like Global AgInvesting and the broader stock market and personal finance for 24/7 Wall Street. She began at CNBC and later helped launch Fox Business in New York. Gerelyn currently resides in Woodland Park, Colorado and dabbles in nature photography as a hobby.
