Life Estate Deeds & Medicaid Planning

Medicaid planning is the process by which a person divests themselves of assets in order to qualify for Medicaid-paid long-term care. It can be difficult to plan appropriately for Medicaid eligibility, because Medicaid requires a person not to have many assets in their own name, while most people want to preserve as many assets as possible for their own families to inherit at a later date. One option that we get asked about it is whether you can “just transfer” a home or a piece of real property to one’s children, while reserving what is known as a life estate for oneself. However, this strategy is not without its pitfalls, and is probably not a good choice for every family.

Places Property In Heirs’ Name

New York law defines a life estate as a form of joint property ownership, where one person retains the use of the property during their lifetime, but the ownership vests in the ‘remaindermen’ – in many cases, parents and their children, respectively. This can be a useful estate planning tool for many people, because it transfers the property immediately to the child’s or children’s ownership, as opposed to waiting until the parent is deceased. What this also means is that since the property is already legally owned by the person’s children, it need not go through the probate process.

This is also the reason why many choose to use life estates as Medicaid planning tools – an asset that no longer legally belongs to the elderly person cannot be used to calculate their Medicaid eligibility. That said, New York Medicaid has what is known as a “lookback” period, which lasts 60 months (5 years) back before a person applies for benefits. Any asset transfers for less than market value (including gifts) will result in a penalty, which could mean months without care in some cases.

Positives & Negatives

While life estate deeds can be helpful to many who are seeking to plan their estates (and plan for Medicaid as well), there are at least two major potential drawbacks with utilizing this type of asset transfer even if it is undertaken before the lookback period would take effect. The first issue is that life estate deeds are very difficult to change, requiring the consent of everyone who is a party to the deed. If a person’s situation changes, it may be necessary to rescind the life estate, or sell the property, but getting everyone’s approval to do so can be a complex endeavor.

In addition, life estates can create tax pitfalls or exclusions, particularly with regard to capital gains. If a person sells their primary residence, they are generally able to receive a large capital gains exclusion, which can offset any tax liability that they might incur by selling. However, if they merely have a life estate, they are not considered the primary seller of the property. Their children would be forced to metaphorically eat any tax liability that the sale would create – which can be a significant amount of money.  This tax liability can be especially significant if the real property has become a highly appreciated asset during the life of the grantor because the recipient of a life-time gift takes the grantor’s cost basis.

Call A Westchester County Estate Planning Attorney

Using a life estate deed to preserve your home may be a good option for your family, but they are not without potential pitfalls. A Westchester County estate planning attorney from Meyer & Spencer, PC can help you clarify your options and construct an estate plan that serves your needs. Contact our office today at (914) 741-2288 to schedule a consultation.