Life Estates may be a valuable Medicaid planning option under the right circumstances.
What is a Life Estate?
A life estate is created when the owner of real property transfers ownership to a second party such as his child, but retains a life estate allowing him the right to use and occupy the premises for his lifetime. The life tenant pays the costs, taxes and expenses for the upkeep of the property. The child retains a remainder interest in the property, or put simply, acquires complete ownership upon the death of the life tenant. Creation of the life estate will not interfere with the life tenant’s exemptions such as veteran’s or STAR.
Are there any advantages in transferring ownership of your house when applying for Medicaid nursing home benefits?
To be eligible for Medicaid, a person must have less than about $4,200 in resources. With a few exceptions, the Medicaid Agency can count your house as an available resource. Upon the acceptance into the Medicaid program, the Medicaid Agency can file a lien against that person’s house to recoup the costs of his medical or nursing home expenses. To reduce assets, a person may be tempted to make an outright gift of his house to a child. If this is done, the transfer is considered a gift by the Medicaid Agency. If the gift is not exempt, the person will be penalized by the Medicaid Agency. It will move back his eligibility date approximately 1 month for every $10,000 of the property’s value.
Let’s look at an example: A single parent Mary has no assets other than her home valued at $600,000 and wishes to apply for Medicaid benefits. Mary transfers ownership to her son Bob on January 1st and then applies for Medicaid on February 1st. She has succeeded in lowering her resources below the $4,200 requirement. However, the Medicaid Agency “looks back” through 5 years worth of her financial records to see if any gifts were made. It will find that Mary has made a non-exempt gift to Bob of $600,000. Using the penalty formula, of 1 month for every $10,000 worth of value, Mary will not be eligible for Medicaid benefits for 60 months from February 1st, assuming she was otherwise eligible for Medicaid.
How can a Life Estate help with my Medicaid planning?
One way of limiting the penalty period is to create a life estate. Once a life estate is created, only the value of the remainder interest held by the child is considered a gift for Medicaid purposes. The value of the remainder interest is predetermined by the Medicaid Agency based upon the age of the life tenant and the value of the house. Let us assume Mary was 70 years of age when she applied for Medicaid. Medicaid has determined that 70 year old Mary holds approximately 60% ownership in the house and Bob owns 40%. The 40% is a non-exempt transfer. Therefore, Medicaid will apply the penalty formula to only $240,000, opposed to the full $600,000, resulting in a delay of eligibility of 24 months opposed to 60 months. (40% of $600,000 = $240,000 divided by the penalty formula of 1 month per every $10,000 worth of value = 24 months of penalty).
Are there any other benefits of a Life Estate?
Yes, the life estate is not an available resource such that the Medicaid Agency cannot place a lien on the property to recoup the cost of medical or nursing home expenses. However, any rental income or profits received by the life tenant is considered an available resource. In addition, upon the life tenant’s death the child will obtain a “stepped-up” basis in value of the home. This means that when the child eventually sells the house, capital gains tax will be based upon the current fair market value, at the date of death, of the property opposed to the amount for which the house was originally purchased.
It should be noted that while life estates have some good qualities, the sale of the home while the life tenant is still in a nursing home can affect his eligibility. Also there are other alternative actions that can produce the same results of a life estate if not better results.