As we discussed in the previous 
article, in order to avoid Medicaid liens and estate recovery, elder law clients would be well advised to learn about their rights to protect their homes. This is true whether they need Medicaid home care and wish to avoid estate recovery, or whether they are planning for nursing home care and wish to avoid liens and/or estate recovery. One strategy entails transferring the home into an irrevocable Medicaid trust which allows for the most flexibility. Another technique to protect the home involves transferring the home to loved one while retaining a life estate in the home. This article will discuss the benefits and drawbacks of a deed with retained life estate for the elder law client.
Life Estate Benefits:
- A legal life estate allows the life estate holder the absolute and exclusive right to live in the property for the rest of their lives. Therefore, the senior can live in their home without worrying about the remainder owners (usually the children) kicking them out. This can also be accomplished with a Medicaid trust.
- The life estate holder has the right to all the rents from the property if it is rented out during his/her life, similar to a Medicaid trust.
- The property avoids probate after the death of the client since it passes by operation of law, similar to a Medicaid trust.
- The life tenant retains their real property tax breaks including STAR, Enhanced STAR, SCRIE, SCHE, etc. which can also be accomplished with a Medicaid trust.
- Under current (March 2014) Medicaid estate recovery laws, the home will not be available to Medicaid under an estate recovery action since the home avoids probate (see above).
- The property receives a step-up in tax basis upon the death of the owner which saves the remainder beneficiaries capital gains tax if the property appreciated after it was purchased. This result is the same under a properly drafted Medicaid trust.
- The transfer of the property with a retained life estate triggers Medicaid’s 5 year look-back period for nursing home care which means the earlier you transfer the home, the sooner you would be eligible for Medicaid nursing home care coverage. The same applies to transfer to a trust.
- The transfer with a retained life estate will often result in a shorter penalty period than a transfer into a trust since the value of the life estate is subtracted from the amount gifted.
- Life estates are cheaper and simpler to create than irrevocable Medicaid trusts.
With all these advantages, one may wonder why attorneys still recommend the use of irrevocable Medicaid trusts. The following disadvantages will highlight some of the reasons. A consultation with a Medicaid planning attorney is crucial before undertaking any course of action.
Life Estate Disadvantages
- When you transfer property with a retained life estate to someone else, you can not sell the property without the remainder owners’ consent.
- You also lose the right to change who the eventual owners will be; once the transfer occurs, you can’t take it back without consent. This contrasts with a trust which allows you to retain a limited power of appointment and change who the eventual beneficiaries will be at any time.
- The property will become an asset of the remainder beneficiaries immediately upon the transfer and will also be available to the creditors and may prevent them from obtaining means tested governmental benefits such as Medicaid and SSI.
- Although both a life estate and a trust transfer require the filing of gift taxes, the transfer of a property with a life estate is a completed gift for gift tax purposes and may therefore require the payment of gift taxes.
- The sale of the home while you are in a nursing home will result in the life estate portion of that transfer (calculated using IRS tables) becoming an available resource.
- If the home is sold, you would not qualify for the full $250,000 exclusion of capital gain tax ($500,000 if you are married filing jointly). Rather, you would be entitled to a partial qualification relative to the value of the life estate.
The decision of whether to use a life estate or an irrevocable Medicaid trust involves many different areas of law as well as individualized personal factors. Therefore, the decision to protect the home while qualifying for Medicaid should be followed up by a conversation with an elder lawyer to make sure that your plan comports with your wishes. Our estate planning/elder law office is available for a free consultation at 347-766-2685.
