Life Estates in Medicaid Planning
"My children would never do that to us!" you say. Maybe not, but one of more of your children could be sued, divorced or go bankrupt in a bad business deal. Since the children now own the house and not you, those creditors could attach "your" house and force a sale, leaving you out on the street.
Often a better solution is to deed the house to the children but retain the right to live in the house for the rest of your life, so that your children only own it upon your death (or, if you're married, following the death of the survivor of you and your spouse). Such a deed gives your children a "remainder interest" in the house, while you have retained a "life estate" in the house.
Since your children have no rights to the house during your lifetime, a divorce or lawsuit against a child cannot have any impact on your continued right to use and possess your house.
Upon your death (or, if you're married, upon the death of the survivor of you and your spouse), the house is immediately and automatically owned by your children. No probate is required to transfer ownership to them at that point. As a matter of fact, even if your will attempted to leave the house to someone else, the will would be ignored, since you've already given the house to your children by way of the deed.
For Medicaid purposes, deeding a remainder interest to one or more children may have the beneficial effect of protecting it against "estate recovery," i.e., the state's claim following your death for reimbursement of any Medicaid expenses it paid on your behalf during your lifetime. The rule in most states is that only assets in one's "probate estate" can be subject to estate recovery. So if the house passes automatically to the children outside of your probate estate at your death, then the state is out of luck.
If you deed your house to your children, and the house is worth $250,000, you just made a gift of $250,000 to the children when you signed the deed. However, if you deed only a remainder interest to your children, then you have made a smaller gift. After all, you have retained the right to use and possess the house for the rest of your life; that has a value. The federal government publishes a table that shows the value of a life estate at ages from 0 to 109; the Medicaid folks rely on this when valuing your life estate.
For example, if you are age 70 and sign a life estate deed, your retained interest in your house is valued at 61% and the gift of the remainder interest is valued at 39%. If you are age 80, you are not expected to live as long as a 70-year-old, so your retained interest is worth less (44%) which increases the gift value (56%).
So if your house is worth $250,000, and you are age 80 when you sign the life estate deed, you just made a gift of $140,000 ($250,000 x 56%). Such a gift will be counted against you if you apply for Medicaid within five years, so do your planning well in advance!
Related Tags: asset protection, nursing homes, medicaid, long-term care, life estate
© 2007 by K. Gabriel Heiser
Attorney K. Gabriel Heiser has devoted his legal practice to Medicaid planning, elder law, and estate planning for the last 23 years.
NOTE: For more information on this topic and other Medicaid planning techniques, see http://www.MedicaidSecrets.com, which describes an exciting new 256-page book written by attorney Heiser, "How to Protect Your Family's Assets from Devastating Nursing Home Costs: Medicaid Secrets." You don't have to go broke to get Medicaid to pay your nursing home bills, you just have to know the rules and planning techniques. For the first time ever, you can learn the inside secrets of high-priced estate planning and elder law attorneys, in attorney Heiser's new book.
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