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Life Estate

What are the options to protect our home?

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The Home Equity Rule

The home is the major asset for most Americans. In addition to its financial significance, it often has emotional significance as the place that parents have raised their children and lived for many decades. They have paid mortgages for up to 30 years and often built, repaired, maintained, and improved the properties themselves.

Medicaid law recognizes the special character of homes, in many states exempting them entirely as countable assets. Congress, however, through the Deficit Reduction Act has limited this exemption to the first $688,000 of equity unless a spouse or minor or disabled child is living in the house. States have the option of increasing the exemption to $1,033,000. This has added to the planning that clients with high-value homes should consider.

The Medicaid Payback Lien

In addition, while the house itself may be protected in terms of Medicaid eligibility, it is not protected from a claim for estate recovery upon the nursing home resident’s death. And the proceeds of the sale of the home are not protected if it is sold during the nursing home resident’s life.

One option for the house is aimed at the healthy spouse of someone who is likely to need nursing home care in the future. It simply states that the house is protected, but that it should be placed in the healthy spouse’s name in order to give him or her control and protect against estate recovery in the event he or she predeceases the nursing home spouse.

The House

Protecting the equity of a home is a universal goal for most families.

The house is a unique asset under the Medicaid rules. It is considered a “noncountable ” resource as long as you or your spouse lives there or states an intent to return there to live. This means that the applicant for Medicaid may continue to own a house, no matter what the value, if he or she claims the house as his or her residence, regardless of whether he or she has any realistic prospect of returning home. However, if the house remains in the Medicaid recipient’s estate, after his or her death the state has an automatic claim on the house to the extent of its expenses for the care of the Medicaid recipient. This estate recovery can be protected against by keeping the house outside of the Medicaid recipient’s probate estate.

The first step is to put the house in community spouses, the spouse not in the nursing home, name alone. This gives them complete control over the house and keeps it out of the institutionalized spouses, the spouse in the nursing home, probate estate. There is no penalty for transfers between spouses. Then, you can consider taking other steps to protect the house in case the community spouse ever require long-term care.

So how do you keep the house out of your probate estate so that the state has no access to it, and in your federal taxable estate so that it gets the stepped-up basis? There are two ways to do this. Both cause the house to pass automatically to your beneficiaries without going through probate.

  1. The Life Estate. One planning technique is for you to give the house to your children while retaining a life estate for yourself. This means that you retain current ownership of the property, while your children automatically have ownership after your death. You would be responsible for upkeep of the house and would receive any rental income. The advantage of this method is that it is relatively simple to put into effect. You simply deed the remainder interest to your children. You would also have to file a federal gift tax return, but no tax would be due at this time.
    There are some disadvantages to this approach. First, you give up some control of the house, since your children will have an ownership interest. They would have to sign any deed if you were to sell or mortgage the property or change your mind about who it should go to. If the house were sold during your lifetime, a portion of the proceeds would go to you and the balance to your children, the amount of each share depending on your age at the time of the sale. Finally, you would be ineligible for Medicaid for the five years following the transfer of the remainder interest to your children, though if worse came to worst, your children could deed back to you their interest in the house and thus “cure ” this transfer penalty.
  2. The Irrevocable Trust. The second method of keeping the house in your taxable estate but out of your probate estate is to place it in an irrevocable trust. After you do so, you cannot change your mind. Once the house is in the trust, it is there for good. If the trustee decides to sell the house, the proceeds of the sale must remain in the trust. Although this protects the cash proceeds, it limits your access to them. This would be an effective transfer at the time of creating the trust, causing your ineligibility for Medicaid for the subsequent five years. You would not have the same option to “cure ” the transfer that you would with the life estate. Though there are restrictions, there are also significant benefits to this trust. If drafted as a grantor trust, the creators of the trust would still be eligible for capital gains exclusions and the beneficiaries would receive a step-up in basis. Though no state will ever allow principal to be distributed from the trust to the grantors, many states will allow principal to go to children or heirs of the grantors – allowing for access to the principal that could be gifted from the children back to the grantors. Finally, trustees can sell real estate without risk of the proceeds being deemed countable resources.

Caretaker Child Exception

You can receive Medicaid coverage while still keeping an ownership interest in your home. However, at your death the state will have the right to recover from your probate estate—essentially your home—whatever it pays out for your care. Your home could escape this claim if it were transferred to one or more of your children. A problem with doing this is that under the general transfer penalty rule, you would be ineligible for Medicaid benefits for up to 60 months following the conveyance.

However, an exception to the transfer penalty allows a Medicaid applicant to transfer his or her home to a qualified caregiver child. The law defines a caregiver-transferee as a child of the Medicaid applicant “who was residing in the applicant’s…home for a period of at least two years immediately before the date of the applicant’s…admission to the institution, and who (as determined by the physician) provided care to the applicant…that permitted him or her to reside at home rather than in an institution. ” In order to qualify under this exception, an applicant should be prepared to submit a certification by his or her attending physician which basically states that, but for the caregiver, the applicant would have had to move to a nursing home.

An important exception to Medicaid transfer penalties is for transfers into trust for anyone who is disabled and under the age of 65. Prior to that, transfers directly to the disabled child of a Medicaid applicant were not penalized. But in many cases, it was inappropriate to give funds to a mentally retarded or mentally ill child. At least some states strictly construed the exception to bar the funding of trusts for such children. OBRA ’93 corrected that narrow thinking and broadened the exception to include trusts for anyone under age 65 and disabled, whether or not he/she is a child of the Medicaid applicant. This form describes this planning option. You will need to check with your state Medicaid agency to determine how it construes the requirement that the trust be “solely for the benefit “ of the disabled individual. Some states require that no remaindermen be listed on the trust, that instead it be payable to the disabled beneficiary’s estate on his or her death, or that a (d)(4)(A) trust be used for this purpose.

Exceptions to the Transfer Penalty

Transferring assets to certain recipients will not trigger a period of Medicaid ineligibility. These exempt recipients include:

  1. A spouse (or anyone else for the spouses benefit);
  2. A blind or disabled child;
  3. A trust for the benefit of a blind or disabled child; or
  4. A trust for the benefit of a disabled individual under the age of 65 (even for the benefit of the applicant under certain circumstances).

Special rules apply with respect to the transfer of a home. In addition to being able to make the transfers without penalty to one’s spouse or blind or disabled child, or into trust for other disabled beneficiaries, the applicant may freely transfer his or her home to:

  1. A child under age 21;
  2. A sibling who has lived in the home during the year preceding the applicant’s institutionalization and who already holds an equity interest in the home; or
  3. A “caretaker child, ” who is defined as a child of the applicant who lived in the house for at least two years prior to the applicant’s institutionalization and who during that period provided such care that the applicant did not need to move to a nursing home.

A transfer can be cured by the return of the transferred asset in its entirety. And in some instances the applicant for benefits may be eligible for a “hardship ” waiver.

Still have questions as to how to protect your home? Call us for a no obligation consultation.

Why You Should NEVER Use a Life Estate Deed

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WHAT IS A LIFE ESTATE DEED?

A life estate deed is a deed that creates a life estate for your benefit during your lives. At your death, the property that is in the deed will pass automatically to who you designated beneficiaries in the deed without going through probate. This will protect the property from estate recovery should you require Medicaid-covered long-term care in a nursing home. While it does give your beneficiary an interest in the property now, you retain the sole right of possession during your lives, meaning that you can tell them to leave if you wish. The only limitation on your control of the property at this time is that you cannot sell or mortgage it without your beneficiary agreeing and signing the deed.

Businessman with Coat and Tie Holding House.

Businessman with Coat and Tie Holding House.

 
After your deaths, your beneficiary will own the property as cotenants with other named beneficiaries, meaning that if either dies before the property is sold, his or her share will pass under the terms of his or her will. The alternative would be to make them joint tenants so that the property would belong entirely to the survivor.
 
Creating this life estate is considered a transfer that will make you both ineligible for Medicaid for 5 years. If the grantor does require nursing home care during that time, the transfer penalty can be ‘‘cured’’ by the beneficiary conveying their remainder interest back to the grantor. We would discuss the best strategy to follow in that circumstance.

Why should you avoid using a life estate deed?

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.
One of the biggest reason why you wouldn’t want to transfer the home subject to a life estate is that should the family decide to sell the home while you are in a nursing home, it will result in the life estate portion of that transfer (calculated using the LIFE ESTATE VALUATION TABLE) becoming an available resource and disqualify you from Medicaid eligibility.
THE MORAL OF THE STORY: If you plan to use a life estate deed, you should plan on holding title in the life estate until the death of the grantors.
A preferred method of holding title would be via an Income Only Trust which would allow for a sale of the real estate without the corresponding ineligibility from Medicaid or having the proceeds being deemed available for the grantors.
Want to discuss more? Contact our office to schedule a no-cost consultation.
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What is a Lady Bird Deed and are They Allowed in Rhode Island?

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Property Deed

What is a Lady Bird Deed and Are They Allowed in Rhode Island?

A Lady Bird Deed (also known as an enhanced life estate deed) is a way to transfer property to someone else outside of probate while retaining a life estate in the property. But unlike a regular life estate, a Lady Bird deed gives you the power to retain control of the property during your life, including the right to use the property for profit or to sell the property.

THE GOOD: The 2014 Rhode Island budget addressed Lady Bird Deeds and the impacts on elder care planning techniques which rely on their use.  The bill created a new statute (R.I. Gen. Laws § 34-4-2.1) which, for the first time, officially recognizes the use of these deeds which are distinguished from traditional life estate deeds in that the life estate holder also retains the power to sell, convey, mortgage or otherwise dispose of the property without the consent or participation of the remainder interest holders.

Traditionally, these deeds have sometimes been used to transfer real estate to family members while avoiding a transfer penalty for purposes of Medicaid eligibility.

THE BAD: However, the budget contains another new statute (R.I. Gen. Laws § 40-8-3.1) that effectively eliminates this planning opportunity by providing that a Medicaid applicant, who has transferred his or her primary residence using a “Lady Bird” or “Enhanced Life Estate” deed recorded after June 30, 2014, must re-convey the remainder interest to himself or herself prior to qualifying for Medicaid benefits.  Upon re-conveyance of the remainder interest, the life estate holder will again own the entire property in fee simple, as if the transfer had never occurred.

So the good news is that Rhode Island finally recognizes Lady Bird Deeds, unfortunately, the primary purpose they were used for, namely Medicaid Planning, no longer works as the new law prohibits its usage for qualification purposes.

Still have questions?  Contact our office for a free consultation what other options still exist for you!