In June of last year, I wrote that “in the near future, life estates will no longer be considered exempt assets when applying for Medicaid.” This was due to the fact that the Virginia General Assembly had recently passed legislation instructing DMAS (the Department of Medical Assistance Services, the agency that oversees the Virginia Medicaid program) to amend the State Medicaid Plan to consider all life estates as countable resources in the determination of Medicaid eligibility. After my column, the new change in Medicaid policy did indeed go into effect. However, since then, the policy has been changed yet again. This article will summarize the changes in the life estate law and explain the current Virginia Medicaid policy.
Life Estate Rule Made More Restrictive
Prior to August 2008, the Virginia Medicaid State Plan treated life estates in real property as exempt resources, meaning that the ownership of a life estate did not affect Medicaid eligibility. Effective August 28, 2008, the aforementioned change in Medicaid policy made life estates created after that date countable resources under most situations, though subject to the same exclusions that apply to other residential real estate (e.g. the home subject to the life estate would be exempt if the Medicaid Applicant, or a spouse or dependent child, was living in the home or the Medicaid Applicant was using “reasonable efforts” to sell the property interest, or during the first 6 months of institutionalization provided the Medicaid Applicant intended to return home).
The American Recovery and Reinvestment Act of 2009 (Recovery Act) that President Obama signed into law on February 17, 2009 provided increased federal funding for state Medicaid programs. To be eligible for the enhanced federal financing, states may not have eligibility standards, methods or procedures in place that are more restrictive than those effective on July 1, 2008. States that implemented more restrictive policies after July 1, 2008 had until July 1, 2009 to reverse these restrictions to receive the increased funding.
More Restrictive Life Estate Rule Rescinded
The August 28, 2008 change in Virginia Medicaid policy regarding life estates created a more restrictive eligibility standard than was in existence in Virginia on July 1, 2008. Therefore, in order for Virginia to qualify for the increased federal funding, the more restrictive life estate policy needed to be reversed. As of May 15, 2009, the more restrictive life estate policy was rescinded. Accordingly, we now have two diferrent Medicaid rules for life estates, depending on the date that the life estate was created:
* As a general rule, life estates created prior to August 28, 2008, or on or after February 24, 2009, are considered exempt assets.
* Life estates created on or after August 28, 2008, but before February 24, 2009, are treated in the same manner as other real property, subject to any applicable residential real property exclusions as mentioned above.
How Can Life Estates Now Be Used in Medicaid Asset Protection Planning?
Life estates have been used throughout Virginia history for many different purposes – Medicaid asset protection planning, estate planning, probate avoidance, and tax planning.
One asset protection strategy involves a parent purchasing a life estate in the home of a child. This strategy is specifically allowed by Medicaid under current law so long as the parent actually resides in the home for at least a year after the purchase of the life estate.
Another planning strategy involves the sale of real estate to a child, coupled with the retention of a life estate. This allows the parent to effectively sell the home for a discounted value, retain the lifetime right to live in the home, and avoid probate, while also preserving a step-up in basis for capital gains purposes on the death of the parent.
A third planning strategy involves the gift of the remainder interest in real estate to a child or children, coupled with a retained life estate. This gift will trigger a penalty period (a period of Medicaid ineligibility) if an application for long-term care Medicaid (which pays for nursing home expenses) is filed by you, or someone on your behalf, within five years of the transfer. However, so long as you don’t need nursing home care within the next 5 years, then there would be no penalty period if you later need nursing home level care.
A parent retaining a life estate in a home that is being sold or gifted to a child has several advantages:
1) The parent continues to qualify for any property tax exemptions such as senior citizens exemptions that were available prior to the transfer.
2) The parent retains the legal right to live in the property until death.
3) The parent retains the legal ability to obtain a reverse mortgage (with the agreement of the remainder beneficiary/ies).
4) The child receives a stepped-up basis for capital gains tax purposes upon the death of the parent.
Life Estate transactions, and the financial and life expectency calculations that must be made in connection with these transactions, are extremely complicated and must be done pursuant to the applicable Medicaid regulations. It is essential that these types of transactions be done under the direct supervision of an experienced Elder Law firm such as the Farr Law Firm.
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About Evan H Farr, CELA, CAP
