If you are considering transferring your property to your children and retaining a life estate, you may want to act now to avoid the adverse effects of Wisconsin Act 20, which changed the law to allow estate recovery from certain non-probate assets, including life estates. (See Changes To Life Estates and Jointly-Held Property detailing the change in the law.) The Wisconsin Department of Health Services (DHS) has announced that it will not pursue recovery from life estates created before August 1, 2014. It will only pursue recovery from life estates created on or after that date. It is important to note that the actual law itself remains unchanged, and the DHS could change its position on recovery from life estates in the future. At this time, however, if you created a life estate in property prior to August 1, 2014 and subsequently receive Medicaid benefits, the DHS will not pursue estate recovery against the property and remainder owners for the value of your life estate interest.

A life estate is created when a property holder (life tenant) transfers ownership of the property to someone else (remainder owner) but retains the right to reside in and benefit from the real estate. Prior to the implementation of Wisconsin Act 20, the DHS could not pursue a claim against the remainder owner in the property after the death of the life tenant for Medicaid benefits paid on behalf of the life tenant while they were alive. However, Wisconsin Act 20 now provides that any property of a decedent (including life estates) that is transferred by a person who has possession of the property at the time of the decedent’s death is subject to the right of the Department of Health Services to recover the value of the decedent’s interest in the property. The interest that is subject to recovery is determined using Medicaid life expectancy tables and represents the fair market value of the decedent’s fractional interest in the property immediately prior to death.

The imposition of estate recovery against life estates is a wide expansion of the estate recovery rules. Of particular concern was the fact that the new law, as it is written, appears to apply to all life estates currently in existence, not just to those created after the effective date of the new law. In other words, life estates created prior to the enactment of the law were not exempt from its provisions.

The announcement from the DHS that it will only pursue recovery from life estates created on or after August 1, 2014 means that those who have previously created life estates remain unaffected by the new estate recovery law. It also presents an opportunity for individuals who are thinking of creating a life estate to do so before the new law will affect the property, as long as the creation takes place before August 1, 2014.