Medicaid Planning: Life Estate Deed Transfer
Typically, the family home is a very important asset for various reasons. Therefore, the concept of “protecting” the home is often a topic of concern. Generally, if the family home is the only asset to protect, a deed to children or others, with a retained life estate for the Grantor (parents), will protect the property and the right to Medicaid, once the look-back period has expired, along with preserving the STAR real estate tax exemption and other tax benefits. This life estate deed would give you the right to live in the residence for your lifetime.
Since the period of ineligibility for nursing home services under Medicaid is equal to the uncompensated value of the resource (the value of the residence less the value of the retained life estate) transferred divided by the regional rate for nursing home care, the use of a life estate deed will result in a shorter transfer penalty than if the transfer were outright or to an Irrevocable Trust.
While the life estate appears to have an initial benefit of a shorter penalty period, there are several drawbacks which must be considered. First, if you sell the residence in the future, you would need the consent of your children. Second, the proceeds would be distributed partly to you as the life tenant and partly to the children as “remainderpersons”. Third, the transfer may adversely affect your ability to maximize your capital gains tax exclusion of $250,000 ($500,000 for a married couple) on the gain from the sale of the residence as your children (the “remainderpersons”), may not reside in the home with you. If they do not reside with you, their portion of the proceeds will not qualify for the capital gains tax exclusion and therefore their portion will be subject to both Federal and New York State capital gains taxes (approximately 22%).
Moreover, if the residence were sold while you were residing in a Nursing Home, then the sale proceeds will adversely affect your Medicaid eligibility as you would be receiving a portion of the net proceeds which would disqualify you from the Medicaid program. An alternative to selling the residence would be to rent the residence to a third party but please note that the net rental income would be part of your Medicaid income budget.
Upon your demise, the fair market value of the residence will be included in your estate for Federal and New York State estate tax purposes. Estate tax returns may be required and estate taxes may be owed. However, the children would own the entire interest in the residence by operation of law and the residence would not be subject to a probate proceeding. Lastly, this transfer would result in your children receiving a “step-up” in the basis for income tax purposes upon your demise which will minimize any income taxes on the subsequent sale of the residence by your children.
This Memorandum is based on current law and is for informational purposes only. It is important that you discuss all legal options and consequences with a qualified elder law attorney prior to any action. Should you wish to discuss your situation with us, please call (631) 424-2800 for a consultation. For additional Memoranda, please call or visit our website at www.elderlaw.pro.
