After a Medicaid recipient dies, the state must attempt
to recoup from his or her estate whatever benefits it paid for the recipient’s
care. This is called “estate recovery.” For most Medicaid recipients,
their house is the only asset available.
to recoup from his or her estate whatever benefits it paid for the recipient’s
care. This is called “estate recovery.” For most Medicaid recipients,
their house is the only asset available.
Life estates
For many people, setting up a “life estate” is
the simplest and most appropriate alternative for protecting the home from
estate recovery. A life estate is a form of joint ownership of property between
two or more people. They each have an ownership interest in the property, but
for different periods of time. The person holding the life estate possesses the
property currently and for the rest of his or her life. The other owner has a
current ownership interest but cannot take possession until the end of the life
estate, which occurs at the death of the life estate holder.
the simplest and most appropriate alternative for protecting the home from
estate recovery. A life estate is a form of joint ownership of property between
two or more people. They each have an ownership interest in the property, but
for different periods of time. The person holding the life estate possesses the
property currently and for the rest of his or her life. The other owner has a
current ownership interest but cannot take possession until the end of the life
estate, which occurs at the death of the life estate holder.
Example: Jess gives a remainder interest in her
house to her children, Joe and Annie, while retaining a life interest for
herself. She carries this out through a simple deed. Thereafter, Jess, the life
estate holder, has the right to live in the property or rent it out, collecting
the rents for herself. On the other hand, she is responsible for the costs of
maintenance and taxes on the property. In addition, the property cannot be sold
to a third party without the cooperation of Joe and Annie, the remainder
interest holders.
house to her children, Joe and Annie, while retaining a life interest for
herself. She carries this out through a simple deed. Thereafter, Jess, the life
estate holder, has the right to live in the property or rent it out, collecting
the rents for herself. On the other hand, she is responsible for the costs of
maintenance and taxes on the property. In addition, the property cannot be sold
to a third party without the cooperation of Joe and Annie, the remainder
interest holders.
When Jess dies, the house will not go
through probate, since at her death the ownership will pass automatically to
the holders of the remainder interest, Joe and Annie. Although the property
will not be included in Jess’s probate estate, it will be included in her taxable estate. The downside of this is that
depending on the size of the estate and the state’s estate tax threshold, the
property may be subject to estate taxation. The upside is that this can mean a
significant reduction in the tax on capital gains when Joe and Annie sell the
property because they will receive a “step up” in the property’s
basis.
through probate, since at her death the ownership will pass automatically to
the holders of the remainder interest, Joe and Annie. Although the property
will not be included in Jess’s probate estate, it will be included in her taxable estate. The downside of this is that
depending on the size of the estate and the state’s estate tax threshold, the
property may be subject to estate taxation. The upside is that this can mean a
significant reduction in the tax on capital gains when Joe and Annie sell the
property because they will receive a “step up” in the property’s
basis.
As with a transfer to a trust, the deed into a life
estate can trigger a Medicaid ineligibility period of up to five years. To
avoid a transfer penalty the individual purchasing the life estate must
actually reside in the home for at least one year after the purchase.
estate can trigger a Medicaid ineligibility period of up to five years. To
avoid a transfer penalty the individual purchasing the life estate must
actually reside in the home for at least one year after the purchase.
Life estates are created simply by executing a deed
conveying the remainder interest to another while retaining a life interest, as
Jess did in this example. In many states, once the house passes to Joe and
Annie, the state cannot recover against it for any Medicaid expenses Jane may have
incurred.
conveying the remainder interest to another while retaining a life interest, as
Jess did in this example. In many states, once the house passes to Joe and
Annie, the state cannot recover against it for any Medicaid expenses Jane may have
incurred.
Trusts
Another method of protecting the home from estate
recovery is to transfer it to an irrevocable trust. Trusts provide more
flexibility than life estates but are somewhat more complicated. Once the house
is in the irrevocable trust, it cannot be taken out again. Although it can be
sold, the proceeds must remain in the trust. This can protect more of the value
of the house if it is sold. Further, if properly drafted, the later sale of the
home while in this trust might allow the settlor, if he or she had met the
residency requirements, to exclude up to $250,000 in taxable gain, an exclusion
that would not be available if the owner had transferred the home outside of
trust to a non-resident child or other third party before sale. Source: www.ElderLawAnswers.com
recovery is to transfer it to an irrevocable trust. Trusts provide more
flexibility than life estates but are somewhat more complicated. Once the house
is in the irrevocable trust, it cannot be taken out again. Although it can be
sold, the proceeds must remain in the trust. This can protect more of the value
of the house if it is sold. Further, if properly drafted, the later sale of the
home while in this trust might allow the settlor, if he or she had met the
residency requirements, to exclude up to $250,000 in taxable gain, an exclusion
that would not be available if the owner had transferred the home outside of
trust to a non-resident child or other third party before sale. Source: www.ElderLawAnswers.com
Contact The Law Office of Inna Fershteyn and Associates
to find out what method will work best for you.
to find out what method will work best for you.