Can I Give a Life Estate to a Child to Protect Assets from Medicaid Recovery?
Full Question:
Answer:
Before you qualify for the government nursing home assistance program, there is a 60 month look back to see if and when you transferred your assets for less than fair cash value or you transferred your assets into a trust system or any system of transferring your wealth for the purpose of becoming eligible for the nursing home program depriving the state of all your available resources for your long-term health care.
Transferring, giving away or selling resources for less than fair market value is called a "disposal of resources". Under the Deficit Reduction act of 2005, the look back period (five years rather than three) will apply to transfers made on or after February 8, 2006. For every $4300 disposed of you will be disqualified for one month of Medical Assistance coverage of your nursing home care.
The penalty period for transfers made on or after February 8, 2006, starts on the later of: the first day of the month after which assets are transferred for less than fair market value, or the date on which you are eligible for Medical Assistance—Long Term Care. The change from 3 years to 5 will be phased in so that, for example, if you apply for Medical Assistance in March, 2009, the look-back period will be three years and one month. As of February, 2011, the full look-back period of five years will be fully in effect. If you give away property or money on more than one occasion, the second penalty does not begin to run until the end of the first one. The length of the disqualification depends on the value of the resources transferred.
Transferring a house to the following people does not affect eligibility for Medicaid:
-A spouse
-A child under the age of twenty-one or a child who is certified blind or certified disabled at any age
-A sibling with an equity interest in the home who has resided in the home at least one year immediately prior to the date the patient became institutionalized and continues to lawfully reside in the home
-A caretaker child who has resided in the home for at least two years immediately prior to the date the patient became institutionalized and who provided care.
If a person's equity interest in the home is $500,000 or less (or $750,000 or less in some cases) and the person intends on returning home, it will not be considered as a resource in determining eligibility for Medicaid. The equity value is derived by subtracting encumbrances such as liens and mortgages from the fair market value. Reverse mortgages and home equity loans can be used to reduce the equity interest.
Creating a life estate without the power to sell the house is a disposal of a resource that may disqualify you from Medical Assistance. If a life estate deed without the power to sell was created long enough ago that there is no penalty, the house is a countable resource, but your life estate without the power to sell has a market value of $0, so it would not disqualify you from Medical Assistance. The purchase of a life estate will be included in the definition of "assets" unless the purchaser resides in the home for at least one year after the date of purchase.
Creating a life estate deed with the power to sell the house is not a disposal, because you still have the power to sell the house at any time without anyone else's permission. However, the house could not be an exempt resource based only on your saying you intend to return home, because the State cannot put a lien on a house owned this way. The market value of the house would be counted as an available resource. If the house would be exempt for other reasons, such as because your spouse or a dependent relative lives in it, then it still would be exempt.
An Enhanced Life Estate Deed is a document that would deed a person’s to her children but reserve for a life estate coupled with the ability to sell the property at any time. This is called an "Enhanced Life Estate." In layman's terms, this means that (1) the owner still owns the property; (2) the owner can sell the property at any time without notifying her beneficiaries; and (3) if the owner never sells the property, the house will pass directly to her beneficiaries after she passes away without going through probate.
Florida, Texas, Ohio, California, Kansas and several other states now accept this form of conveyance. In these states it is a recommended alternative to the traditional life estate deed. Of course, where a life estate can result in unwanted capital gains taxation, it should not be used, and other forms of planning should be considered (such as a living trust).
The Enhanced Life Estate Deed has several other benefits including:
(1) bypassing probate;
(2) it does not result in capital gains for the beneficiaries because they will not receive any value until my client passes away. When she passes away, her beneficiaries take the home at a "stepped-up basis" - not my client's original basis. A "stepped-up" basis is the value of the property on the day of my client's death;
(3) it does not open up the property to the beneficiaries' creditors during the owner’s lifetime because the beneficiaries have no interest until the owner has passed away without selling the home;
(4) it allows a person to sell her home at any time, compared to a regular life estate where she would not be legally entitled to sell her home.
Below is an example of a state transfer policy:
Life Estate Transfers
There are several instances when a life estate transfer of assets must be considered. See Transfers for more information on transfer policy.
Note: See Purchases as Transfers for more information when a person purchases a life estate interest in another person's home.
Evaluate a life estate for a possible transfer by the original owner of the property when:
l The life estate is established. Evaluate the life estate as a transfer at the time of a request for MA payment of LTC services or GAMC if the life estate is established prior to application and the life estate was created during the lookback period.
n Creating the life estate and granting the remainder interest to someone other than the property owner is a transfer of real property.
n The value of the transfer is the value of the remainder interest, less any compensation received..
Example:
Holly retained a life estate in her home two years ago and transferred the remainder interest in the property to her son, Nik, as the remainderman. She applies for health care today to help pay for her stay in the nursing home.
Action:
Following transfer policy, evaluate the life estate as a transfer of assets even though it was established before application because it took place within the lookback period.
Example:
Marty lives in his home and receives elderly waiver services. Last July he transferred his home to his son, reserving a life estate for himself. Marty continues to live in his home. Marty did not receive compensation for the remainder interest.
Action:
An asset transfer has occurred by creating the life estate. The value of the transferred remainder interest in the property on the date the remainder interest was transferred to Marty’s son is the value of the uncompensated transfer.
Marty's life estate is an excluded asset because Marty continues to live in the home.
l The life estate is terminated prior to the death of the life estate owner, such as with a conditional limitation.
The value of this transfer is the value of the life estate interest on the date of the termination, less any compensation received. See Determining Life Estate Values.
Example:
Keesha retained a life estate interest in her home 20 years ago, and transferred the remainder interest in the property to her daughter. The life estate contract had a conditional limitation indicating that if Keesha was permanently placed in a residence outside of the home, the life estate would terminate and the property would be entirely transferred to Keesha’s daughter. Keesha was moved to an LTCF last week and it is a permanent placement. Keesha is now applying for health care.
Action:
There was a transfer of assets, the value of the remainder interest, when Keesha originally set up the life estate 20 years ago. However, it is now past the lookback period for transfers so do not evaluate this transfer.
Evaluate a transfer for the date that the life estate contract was terminated upon Keesha’s permanent LTC placement. Complete the calculation to determine what Keesha’s life estate interest was on the date of the termination. The amount of the life estate interest, less any compensation received for the value of the life estate interest from her daughter, is the amount of the transfer.
The elements of a fraudulent conveyance transfer are defined as follows by the Uniform Fraudulent Transfer Act:
(a) A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor's claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation:
(1) with actual intent to hinder, delay, or defraud any creditor of the debtor; or
(2) without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor:
(i) was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or
(ii) intended to incur, or believed or reasonably should have believed that he [or she] would incur, debts beyond his [or her] ability to pay as they became due.
Please see also:
http://theonlinelawyer.blogspot.com/2006/08/californias-revocable-deed-aka.html
