What happens the wife dies but before she does dad has Alzheimer's she gives the money for the sale of the house to her kids?

Virtually every state has "Undue Hardship" provisions in their Medicaid policy manuals. I quickly searched for same in Rhode Island as that appears to be where you live (rules/procedure vary by state) and came up with this:
http://www.sos.ri.gov/documents/archives/regdocs/released/pdf/EOHHS/7728.pdf
Check Section 0384.45.05 - "Claims of Undue Hardship" in this document.
Many well meaning attorneys may have you jump through all kinds of expensive hoops when a simple letter explaining the circumstances and requesting a hardship exemption for the transfer will do the trick.

Spacey, consult an experienced Elder Law attorney to help you straighten this out in your father's best interests. I don't think this is a do-it-yourself project.

I agree with Jeannegibbs. The laws on this are complicated and you need someone who is well versed in them.

How long were they married? Whose name was on the deed of the house? Let's say it was her house, worth $100K when they married. If they were married a long time, she sells it at a profit of $50K. Well, half of that 50K is technically his. Medicaid will impose a penalty based on the portion that should have gone to him and his care.

If both husband & wife's name was on the deed to the house, legally each owns 50% of the house. If the wife sold the home & gave 100% of the proceeds to her children, the kids will have to pay back 50% to Medicaid if the sale of the house & the money given to the kids was within a 5 year period.

If only her name was on the deed, she owns 100% of the house & 100% of the sale proceeds are hers & she can do whatever she wants to do with the money. In divorces, if the deed is in one spouse's name & the house is sold, whatever equity is built up in the value of the house is both of theirs, 50% each---but just the equity. For purposes of Medicaid, I don't think it is the same. They view the ownership of the home as to whose name is on the deed.

You need a lawyer. In some states, even though one spouse owns the house, it may depend on how long the other spouse lived there and what he paid towards upkeep on the house. I knew one couple that were widow and widower. He moved into her house with the understanding that if she died first he could stay in the house. When he died, the house reverted back to her children.

First off, as jeanne stated, get an attorney. Then make sure you have access to any will she might have had, house documents etc. If you need Medicaid it will probably be better if he did not own it .

Many lawyers will do a free initial consult...but as RalphRobbinsCFP said so eloquently, they might have you jump thru many expensive hoops by the time you accomplish what you went there to solve. I have love/hate relationship with lawyers-- you need them quickly to do something, and you trust them to have all the answers (of course they must be good, when they cost THAT much) however in reality, you are only one of dozens of clients, and you pay by the tenth of an hour, even if you call them to ask for any updates on your case and they call back to say, no news, you pay. Wish there were a better way, especially when we are trying to help our parents, most of whom do not have much money, and desperately need to keep their money for medications, depends and oxygen. But you also need lawyer experts to sort out many tricky legal issues, like title to home after 2nd marriage, and whose kids inheriting what, or at all.