An in-law suite is a section of a child’s house that has been specifically constructed or set aside for an older adult relative. The in-law suite often has a separate entrance that allows the older adult to live close to the child’s family but have their own quarters, where they can watch television and prepare their own meals in a kitchenette.
Elder law attorneys are occasionally asked how the construction of such an addition could affect the older adult’s eligibility for Medicaid if they were to need nursing home care. Medicaid pays for nursing home care but has various financial qualification rules, including rules about gifting assets within the five (5) years prior to applying for Medicaid. The gift of money to a child from the older adult for the purpose of constructing the in-law suite can be considered a disqualifying gift if it does not comply with Medicaid rules.
The amount that can be given to the child for the construction depends on a variety of factors. A helpful approach is to determine how much it would cost the older adult to purchase a life estate in the child’s home. Life estates are lifetime rights of residence in real property that are dependent on the age of the life tenant. To calculate the value of the life estate, the fair market value of the child’s home would be multiplied by a life estate factor correlated to the age of the older adult. The resulting number determines how much the life tenant’s right of residency is worth and thus, how much they should invest in the child’s home without being considered a gift. In most cases, the government does not want the investment in the child’s home to exceed the life estate value.
Investments in a child’s home for the purpose of constructing an in-law suite can be analyzed like the purchase of a life estate. The cost of the construction should be similar in value to the life estate in the child’s home. If there are factors that have pushed the construction beyond that value, be prepared to explain that cost if an application for Medicaid is needed within five (5) years.
To avoid being characterized as a gift, the older adult must live in the child’s home for at least one (1) year after construction of the in-law suite. Some record of residency would be needed, such as an agreement to pay for a percentage of household expenses. The older adult’s share of utilities, taxes and insurance should be set forth in a residency agreement and there should be a record of payment from their bank account.
Modification of a child’s home does not always result in a period of ineligibility for Medicaid. Improvements in the bathroom, such as a walk-in shower or grab bars, along with entrance ramps, are intended to benefit the older adult and are typically not subject to the same review as investments for new construction.
As each case is different, you should seek the advice of an elder law attorney before starting any construction on an in-law suite or having an older adult purchase an interest in a child’s home.
