Due to changes in Medicaid rules, the once-common practice of utilizing a life estate to protect the value of an individual’s residence from long-term care costs, such as a nursing home or assisted living facility, will no longer protect the full value of an individual’s residence, and in some situations, may cause great difficulty in the individual being able to obtain Medicaid eligibility at all.
In the United States, long-term care costs are not covered by traditional health insurance, such as Medicare. While individuals may purchase a separate long-term care insurance policy to assist with paying for long-term care, the cost of these policies is often too expensive to be a viable option. Because of this, most individuals’ only option to obtain assistance with paying for long-term care costs is to pursue Medicaid eligibility. Medicaid is only available to individuals that fall below a certain threshold of countable assets. For a single individual, the individual must have less than $2,000 in countable assets to qualify. Further, the Medicaid eligibility rules contain a five-year lookback provision, which prohibits the individual from gifting assets away during the five years immediately prior to applying for Medicaid. If the individual has gifted assets away during this period, Medicaid will not pay for the individual’s long-term care costs for a certain period of time, depending on the value of the gifts made.
Because of the five-year lookback, an individual may choose to transfer assets out of the individual’s name to someone, such as the individual’s children, in the hopes that the individual will not need to obtain Medicaid eligibility until more than five years after the gift takes place. Because an individual’s residence is often one of the individual’s most valuable assets, it is not uncommon for an individual to consider gifting the individual’s residence for this purpose. If the individual is successful in making it through the five-year time period before needing to seek Medicaid eligibility, the value of the residence or other assets gifted, will be protected and will not have to be spent on long-term care costs.
Although this strategy may help protect assets from long-term care costs, gifting an individual’s residence can be risky, as once the residence has been gifted, the individual no longer has any right to continue to reside in the residence unless permitted to do so by the residence’s new owner. In order to mitigate this risk, an individual used to be able to utilize a life estate, which allows the ownership of a piece of real estate to be split in time. The individual would transfer the ownership of the residence to a child, for example, and retain a life estate. The child would then own what is called a remainder interest in the residence. The life estate allows the individual to continue to reside in the residence during the individual’s life, but upon death, the child owning the remainder interest becomes the sole owner of the residence. This protects the individual by ensuring the individual is legally able to reside in the residence until death.
A life estate, like any other real property interest, can be sold. However, even if a life estate is sold or transferred to a third party, the life estate will continue to be based upon the individual’s life, so upon the individual’s death, the life estate terminates and the individual’s child owning the remainder interest becomes the owner of the residence. If a third-party would purchase the life estate from the individual, the individual could die the very next day, thus terminating all of the third-party’s ownership interest in the property. For this reason, life estates really only have value to the individual upon which the life estate’s duration is based, thus making the fair market value of a life estate practically worthless.
The Medicaid rules used to be consistent with this analysis and treated life estates as having no value, so if an individual owned a life estate, it would not preclude the individual from obtaining Medicaid eligibility. However, the Medicaid rules now treat life estates drastically different and deem the life estate to be worth a certain percentage of the total value of the residence, depending on the age of the life estate owner. For example, if the life estate owner is 80 years old and the life estate is for a residence with a fair market value of $200,000, Medicaid deems the individual’s life estate to be worth around 43% of the total value of the residence, or $86,000. This puts the individual over the $2,000 countable asset limit, thus making the individual ineligible for Medicaid. Worse yet, as discussed above, the life estate’s true value is practically $0, but Medicaid will treat the life estate nearly the same as if the individual had $86,000 in cash sitting in the bank. This creates a very difficult situation for individuals who find themselves owning a life estate valued in this manner by Medicaid, as the individual will be required to spend the $86,000, which does not actually exist, before being able to obtain Medicaid eligibility. Further, if the individual terminates the life estate by allowing the residence to transfer to the person owning the remainder interest during the individual’s life, instead of at death, Medicaid will treat that transfer as an $86,000 gift, which violates the five-year lookback.
Due to these complexities, an individual interested in taking proactive steps to protect the value of the individual’s residence or other assets or who currently owns a life estate should seek the advice of an attorney who is familiar with the nuances of the Medicaid rules.
This is a general summary of the law and should not be used to solve individual problems as slight changes in the fact situation may require a material variance in the applicable legal advice.
Mark A. Wagner, Esq.
Canton and New Philadelphia offices