| MEDICAID AND LIFE ESTATES
CLIENT QUESTION:
My question is the following: if a person who is currently on Community Medicaid (home care) is being transitioned to a nursing home, and they have a life estate on their house, which is paid off, and the deed was transferred out of their name in 2019, can Medicaid place a lien, or can the life estate be affected?
MY RESPONSE:
I understand your concern. We get this question all the time. Let me explain what this is all about.
A life estate is created by signing a new deed to your property. For example, mom owns a house and signs a deed transferring the house to her two children, but retains a life estate…the exclusive right to own, use, possess, and enjoy the home for life. It is a hybrid type of ownership. Mom and the two children own the house. The mom has a present interest, and the children have a vested future interest. The percentages of who owns what are set by an IRS table based on the age of the life estate holder and the interest rate that month that determines the relative values. Suffice it to say that, the older Mom is, the less her life expectancy, therefore the less the value of her life estate. To further clarify, an older age results in a lower life estate value since the calculation is based on a shorter life expectancy.
From a Medicaid point of view, the transfer to the children is counted as part of the lookback period. Since the transfer in your question was in 2019, the five-year lookback is over, and the house is protected from both Community and Nursing Home Medicaid. In addition, Medicaid can not put a lien on the life estate retained, so you are good.
But understand that our office rarely will do a life estate because of the problems incurred if the property is sold during the life of the life estate holder. In the example above, if the property were sold, Mom and the children would split the proceeds along the IRS percentages. The larger amount would go to the children, who would have to pay capital gains tax on the sale, largely because they will not have a $250,000 capital gain exclusion since it is not their principal residence. Mom’s smaller amount will also be subject to capital gains tax, but she will probably not pay tax because she can use her $250,000 capital gain exclusion. However, Mom’s percentage will no longer be protected from Medicaid because now it is considered cash in her bank account. So, a sale during life comes with tax and Medicaid exposure. We only recommend life estates when our clients sign in blood that they will never sell the house during their lifetime. After death, no problem.
This is why an irrevocable trust is so popular. The trust will also protect the house after the five-year lookback, but if the house is sold while Mom is still alive, the full $250,000 ($500,000 for a couple) exclusion will be used to offset the capital gains tax on the full property, and the sale proceeds will stay in the trust and remain protected. |
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