Question: What is a life estate and how can it be used in Medicaid Planning?
Life estate deeds are used in Virginia for many different purposes, including Medicaid planning and avoiding probate. A life estate in real estate is a type of “split interest” ownership based on time, similar in concept 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. When 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. Life estate can be used in Medicaid planning because a life estate is considered an “exempt asset” for Medicaid purposes, meaning you can own a life estate and still get Medicaid.
One Medicaid planning and probate-avoidance 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,” which will allow 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. In this situation, the deed would normally be written so that the mother will still be responsible for the payment of all taxes, insurance and maintenance on the home.
Another Medicaid planning and probate-avoidance strategy involves a parent purchasing a life estate in the home of a child. Medicaid allows this so long as the parent actually resides in the home for at least a year after the purchase.
Another common Medicaid planning strategy involves the gift of a remainder interest. A gift of a remainder interest in real estate has many advantages over an outright gift of real estate by a regular deed:
- the parent, as the owner of the life estate, will continue to qualify for any property tax exemptions such as veterans and senior citizens exemptions that were available prior to the transfer;
- the parent will not lose the legal right to live in the property, sell the property, or rent the property;
- the children can’t make the parent move out;
- the children’s creditors or bankruptcy trustee can’t take possession of the property;
- capital gains when the children sell the home will be calculated on a stepped-up basis, which is the value at the date of the parent’s death rather than the parent’s original cost basis; and
- since the value of the remainder interest is lower than the full value of the house, a gift of a remainder interest will result in a shorter Medicaid penalty period than a transfer of the entire house.
To determine exactly how a gift of a remainder interest will affect eligibility for Medicaid, the look-back period and the value of the transfer must be considered. The transfer is not considered to be for the full value of the house but only the “remainder interest” in the house. The remainder interest is the right that the children have to receive the home automatically upon the death of the parent.
The value of the remainder interest is calculated using special actuarial tables that determine the parent’s life expectancy. The number of months of ineligibility is calculated by dividing the value of the transfer by a number known as the “penalty divisor” — $6,654 per month in Northern Virginia, $4,954 throughout the rest of the Commonwealth.
The Medicaid agency cannot require an applicant to liquidate the life estate or to rent the life estate interest property. However, if the property is rented, the net rental income must go to the nursing home resident and will be counted in determining eligibility for Medicaid.
If the property is sold during the lifetime of the parent, how the sales proceeds are treated depends on how the deed is worded. The deed can be worded so that the parent will continue to have a life estate in any replacement real estate and/or in the proceeds of sale. If the parent receives income from the invested proceeds, that income will be counted in determining eligibility for Medicaid. Or, the deed can be worded so that the life estate is terminated upon sale of the property, in which case the parent’s portion of the proceeds will be a countable resource for determining Medicaid eligibility.
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 in connection with a comprehensive Asset Protection Plan.