Use of a Life Estate Should be Rare – Part 2

November 23, 2004

Life Estate Benefits A transfer of real property by deed with a retained life estate can protect the property from having to be consiered an available asset when seeking Medicaid coverage of long term care expenses. Subject to the look-back and transfer penalty rules, at a certain time in the future, the property will be protected.

A transfer of any non-exempt asset causes a Medicaid penalty, that is an amount of months in which the Medicaid applicant will not be eligible for Medicaid. Currently the formula to determine this, on Long Island, is, subject to a three year look-back (five years if the transfer is to an irrevocable trust) that the applicant will not be elgible for Medicaid for one month for each $8,272 transferred.

One benefit of a life estate is that the value of the retained life estate itself is not considered for such transfer penalty purposes, thereby reducing the penalty period from the longer period based on the full value of the property.

The value of the retained life estate remains an asset of the Medicaid applicant, but it is at best an illiquid asset which Medicaid practically ignores. Medicaid will place a lien on this life estate value, but the lien is extinguished with the life estate itself upon the death of the life tenant.

Lawyers and their clients also love life estates because they keep seniors in control of their homes and allows them to retain all property tax exemptions.

Furthermore, upon the death of the life tenant, the reamindermen children now own the entire property, without probate, and they receive a step-up in tax basis, thereby eliminating all captial gains when the property is sold after their parents’ death.

Life estates sound great. Our senior clients are in control, they have protected their homes from long term care, they have avoided probate and have preserved all tax benefits. So what could possibly be wron with the life estate technique in this context? Tune in for the answer in an upcoming newsletter.