Q. What is a life estate, and how can it be used in Medicaid Planning?
A. Life estate deeds are used for many different purposes, including Medicaid planning and avoiding probate. A life estate in real estate is a type of “split interest” ownership based on time, similar in concept to a time-share. If you own a time-share, you have the exclusive right to use your time-share property during your period of ownership, typically a certain week each year. When you own a life estate, you have the right to live in the property for the rest of your life, and your ownership interest terminates upon your death. A life estate can be used in Medicaid planning because a life estate is considered an “exempt asset” for Medicaid purposes, meaning you can own a life estate in most states and still get Medicaid.
One Medicaid planning and probate-avoidance strategy involves the sale of real estate coupled with the retention of a life estate. For example, a mother can transfer a home to her daughter by deeding the property to the daughter with the mother keeping a “retained life estate,” which will allow the mother the right to live in the home for her remaining lifetime and to be considered the owner of the home for most purposes. In this situation, the deed would normally be written so that the mother will still be responsible for the payment of all taxes, insurance, and maintenance on the home.
Another Medicaid planning and probate-avoidance strategy involves a parent purchasing a life estate in the home of a child. Medicaid allows this so long as the parent actually resides in the home for at least a year after the purchase.
Another common Medicaid planning strategy involves the gift of a remainder interest. A gift of a remainder interest in real estate has many advantages over an outright gift of real estate by a regular deed:
- the parent, as the owner of the life estate, will continue to qualify for any property tax exemptions such as veterans and senior citizens exemptions that were available prior to the transfer;
- the parent will not lose the legal right to live in the property or rent the property;
- the children can’t make the parent move out;
- the children’s creditors or bankruptcy trustee can’t take possession of the property;
- capital gains when the children sell the home will be calculated on a stepped-up basis, which is the value at the date of the parent’s death rather than the parent’s original cost basis; and
- since the value of the remainder interest is lower than the full value of the house, a gift of a remainder interest will result in a shorter Medicaid penalty period than a transfer of the entire house.
The Medicaid agency cannot require an applicant to liquidate the life estate or to rent the life estate interest property. However, if the property is rented, the net rental income must go to the nursing home resident and will be counted in determining eligibility for Medicaid.
If the property is sold during the lifetime of the parent, how the sales proceeds are treated depends on how the deed is worded. Typically, the owner of the life estate would receive the value of the life estate interest (in which case the parent’s portion of the proceeds will become a countable resource for determining Medicaid eligibility, unless otherwise protected) and the owner of the remainder interest would receive the value of the remainder interest. Whether these values are determined based on Medicaid rules or IRS rules is a complicated determination and should be determined by the wording of the deed.
But the deed can be worded so that if the property is sold, the parent will continue to have a life estate in any replacement real estate and/or in the proceeds of sale, meaning that if the parent receives income from the invested proceeds, that income will be counted in determining eligibility for Medicaid.
Life Estate Deeds, and the calculations that must be made in connection with the purchase or sale of life estates and/or remainder interests, are extremely complicated, and should only be done by an experienced elder law attorney in connection with a comprehensive Asset Protection Plan.
Many times life estates do not make sense, and an irrevocable Medicaid Asset Protection Trust such as the Living Trust Plus makes more sense. Often the Living Trust Plus is used in connection with a life estate deed.
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