States don't take anyone's property. However, they could condition eligibility for Medicaid coverage on the property's sale. Also, even if they don't, the property might have to be sold to pay back the state for the cost of the owner's care at death. There are usually waivers of these requirements if dependent relatives are living in the property. These exceptions are very narrow.
Medicaid and Long-Term Care Basics
When using Medicaid to pay for long-term care expenses, the recipient may have to spend down some money and property to qualify. Medicaid’s estate recovery program allows them to recoup health care costs later. A home may be the only asset of significant value. However, estate planning strategies can put valuable assets like a home in a trust to preserve it for family members who need it.
Find out if your mother-in-law's sister prepared any estate planning documents. You will need to consult with an elder law attorney in your state to determine whether your mother-in-law might qualify for an exception to stay in the home and what steps the family might need to take to preserve the house.
Harry S. Margolis practices elder law, estate, and special needs planning in Boston and Wellesley, Massachusetts. He is the founder of ElderLawAnswers.com and answers consumer questions about estate planning issues here and at AskHarry.info.