See update on this article here.
In Virginia, a life estate in real estate has always been treated as an exempt asset for the purposes of Medicaid eligibility. Unfortunately, the Virginia General Assembly recently passed legislation that instructs DMAS (the Department of Medical Assistance Services, the agency that oversees the Virginia Medicaid program) to amend the State Medicaid Plan to count all life estates as countable assets in the determination of Medicaid eligibility. This means that in the near future, life estates will no longer be considered exempt assets when applying for Medicaid.
Life estates have been used throughout Virginia history for many different purposes – Medicaid asset protection planning, estate planning, probate avoidance, and tax planning. This significant new change in the law, once implemented, will negatively affect many Virginians wishing to protect their homes from the devastating expenses of long-term care.
A Call to Action
Because DMAS has not yet amended the State Medicaid Plan, Medicaid still considers a life estate as an exempt resource, but this will soon change. If you own a home, or live with a child in the child’s home, and have been considering Medicaid Asset Protection, it is imperative that you contact us today. Together we can determine whether a life estate fits your long-term care planning needs.
What Is a Life Estate?
A life estate in real estate is a type of “split interest” ownership somewhat similar to a timeshare. If you own a timeshare, you have the exclusive right to use your timeshare property during your period of ownership, typically a certain week each year. If 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.
As of today, a life estate is still considered an “exempt asset” for Medicaid purposes, meaning you can own a life estate and still get Medicaid. However, the window of opportunity will soon be closing, though at this point we don’t know exactly when.
How Are Life Estates Used in Medicaid Asset Protection Planning?
One Medicaid planning 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.” This allows 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.
Another Medicaid planning strategy involves a parent purchasing a life estate in the home of a child. Medicaid allows these asset protection techniques so long as the parent actually resides in the home for at least a year after the transaction.
A third Medicaid planning strategy involves the gift of real estate, coupled with a retained life estate. A gift of this nature (technically called a gift of the “remainder interest”) has many advantages over an outright gift of real estate. A few of the advantages are:
1) The parent, as owner of the life estate, continues to qualify for any property tax exemptions such as senior citizens exemptions that were available prior to the transfer.
2) The parent will not lose the legal right to live in the property.
3) The recipient(s) of the property receive a stepped-up basis for capital gains tax purposes.
4) Since the value of the remainder interest is lower than the full value of the entire piece of real estate, a gift of a remainder interest results in a shorter Medicaid penalty period than a transfer of the entire house.
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 such as Evan Farr, and in connection with a comprehensive Asset Protection Plan.
If you own a home, live with a child in the child’s home, or are planning to live with a child in the child’s home in the future, please contact us today for a consultation to determine whether a life estate is right for you.
About Evan H Farr, CELA, CAP
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