Preserving a Residence While Qualifying for Medicaid

Medicaid is a jointly funded federal and state program that provides health insurance coverage, including long term care services, to eligible New Jersey residents. Although every state receives federal funding and must comply with federal guidelines, each state administers its own program and establishes its own eligibility requirements. As a result, Medicaid eligibility rules, including income limit, resource allowance and estate recovery, vary from state to state.

The average cost of care in a skilled nursing facility is $13,000, and most families cannot afford it. That is why many people look to Medicaid to help cover these costs. However, individuals are often concerned that qualifying for Medicaid will require them to give up ownership of their residence, either during their lifetime or upon their death. This concern is heightened especially when the home is one of the only assets they can leave to their children. With proper and timely estate planning, a Medicaid applicant may be able to preserve his or her residence while still qualifying for Medicaid benefits.

Medicaid Eligibility Requirements

Medicaid determines an applicant’s financial eligibility by evaluating both the applicant’s income and resources and those of the non-applicant spouse, known as the community spouse. In 2026, an applicant seeking eligibility for Medicaid in New Jersey is subject to a monthly income cap of $2,982 and a resource allowance of $2,000. When determining countable resources, Medicaid looks at the applicant’s liquid assets (checking, savings, investment and retirement assets), the cash surrender value of a life insurance policy, and real property other than the primary residence. Medicaid excludes the applicant’s vehicle and his or her primary residence (up to a home equity limit of $1,130,000 in 2026) (N.J.A.C. 10:71-4.4). An applicant’s primary residence is automatically exempt if he or she resides there, or it is occupied by his or her community spouse, a child under the age of 21, or a permanently blind or disabled child of any age.

Since the primary residence is considered an exempt resource, the applicant may assume that his or her home is fully protected from Medicaid. Although it is not counted as a resource for eligibility purposes, a Medicaid recipient’s primary residence will be subject to New Jersey’s Medicaid estate recovery program if planning is not done prior to application. Further, if the applicant is in a long-term care facility and there is no spouse or blind or disabled child residing in the home, Medicaid expects that the home will be sold and the proceeds spent down on the cost of care.

Medicaid Estate Recovery Program

If a Medicaid recipient was 55 years or older at the time he or she received Medicaid benefits, Medicaid has the right to seek reimbursement from the recipient’s estate for the cost of Medicaid benefits received (N.J.S.A. Section 30:4D-7.2(2)). New Jersey defines “estate” broadly for recovery purposes. The term includes all real and personal property, as well as any other resources in which the Medicaid recipient had any legal title or interest at the time of death (N.J.S.A. Section 30:4D-7.2(3)). Therefore, even though a home may not have been a countable asset for Medicaid eligibility purposes, it may still be subject to estate recovery absent proper estate planning.

Medicaid imposes a five-year lookback period (N.J.A.C. Section 10:71-4.10(b)(9)). When an individual applies for Medicaid, the agency reviews all transfers of resources made during the five years preceding the application. Transfers of assets for uncompensated value made during that period will result in a period of ineligibility, during which the individual must pay privately for his or her cost of care. There are, however, techniques that can preserve the home from Medicaid recovery.

Outright Transfer

The simplest approach to handling a residence is an outright transfer (without a trust). In doing this, the recipient would inherit the cost basis (i.e. the purchase price plus capital improvements). This results in a significant capital gains tax on the property upon a subsequent sale because if the individual transfers the house while he or she is alive, rather than on his or her death, the tax basis in the house will be the purchase price rather than the value on the date of death. If the recipient does not reside in the home, he or she cannot claim the capital gains tax exclusion for a primary residence on the sale. In addition, the outright transfer would be considered a transfer of full value for Medicaid purposes. An outright transfer may also expose the property to the recipient’s creditors and prevent the homeowner from deciding how the property will pass upon death. For these reasons, we do not recommend this option.

Life Estate Deed

A life estate deed can be used to avoid Medicaid estate recovery of one’s home. Under this arrangement, the homeowner retains a life estate, which allows him or her to continue residing in and using the property for the rest of his or her life as a life tenant, while transferring the remainder interest to the beneficiaries who will receive the property upon the death of the life tenant. Since the remainder beneficiaries do not take possession of the property until the life estate ends, they cannot force the life tenant out of the home during his or her lifetime. In addition, when the life tenant dies, the remainder beneficiaries receive a step-up in basis, meaning, the cost basis for capital gains tax purposes is the value of the home at the date of death.

A life estate deed also has limitations. Although only the value of the remainder interest is treated as transferred for Medicaid purposes, the full value of the property will generally be included in the donor’s taxable estate. Additionally, if the property is sold during the donor’s lifetime, the remainder beneficiaries are entitled to a portion of the sale proceeds based on the value of their remainder interests. While a life estate deed allows a donor to retain the right to occupy the home during life and may provide favorable tax treatment at death, it also limits their flexibility to sell the property without involving the remainder beneficiaries.

Trust

Instead of using an outright transfer or a life estate deed, an applicant may transfer their primary residence to an irrevocable trust. The trust would be structured so that the grantor does not retain any interest in income or principal. The trust may be funded with the grantor’s other assets as well. If the transfer is made more than five years before the Medicaid application, the assets transferred to the trust will not be treated as countable resources for Medicaid eligibility purposes. In addition, because the grantor no longer retains direct ownership of the property, the residence may be protected from Medicaid estate recovery.

With an irrevocable trust, the grantor transfers ownership of the home (and other assets) to the trust and appoints an independent trustee to hold legal title and manage the trust property in accordance with the terms of the trust agreement. Since the trust is irrevocable, the grantor gives up direct ownership of the transferred assets. The grantor can designate anyone but himself or herself as beneficiary of the trust.

Although the grantor no longer legally owns the property, the trust may be drafted to allow the grantor to retain certain rights and benefits. A common structure permits the grantor to continue residing in the home for the remainder of his or her lifetime while remaining responsible for maintenance, upkeep, taxes, and other property-related expenses. This way, the property will be included in the grantor’s taxable estate at death, thereby allowing the beneficiaries to receive a step-up in basis. However, there is a risk that by having the property includable in the grantor’s taxable estate, Medicaid will take the position that this retained interest pulls the property back into the estate for estate recovery purposes.

Another approach to preserving a home from estate recovery is to execute a life estate deed that names the irrevocable trust as the remainder beneficiary. This structure may avoid estate recovery, preserve a step-up in basis for the beneficiaries, protect the home from the trust beneficiaries’ creditors and ensure that sale proceeds are paid into the trust. Further, this structure provides more control over the disposition of the trust assets after the beneficiary’s death.

With proper and timely planning, a home can often be preserved while qualifying an individual for Medicaid benefits. Whether through a life estate deed, an irrevocable trust, or a combination of both, advance planning may allow a residence to remain protected from estate recovery while also preserving favorable tax treatment for beneficiaries. Timing is critical, however, because transfers must be completed more than five years before a Medicaid application is filed to avoid penalty and to ensure that the transferred assets are no longer treated as countable resources. Without advance planning, a Medicaid recipient’s home may remain vulnerable to estate recovery after death.

By evaluating these options early, individuals may be able to protect their primary residence, preserve other assets, and secure access to needed long-term care benefits.

Reprinted with permission from the June 22, 2026, issue of the New York Law Journal. © 2026 ALM Global Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-256-2472 or asset-and-logo-licensing@alm.com.