Many people have established a life estate in their residence to protect it if they require Medicaid benefits to pay for their long-term care. A person establishes a life estate in their residence by signing a deed which transfers ownership to their desired recipients, but also reserves them the legal right to use and benefit from the residence for their lifetime. Under current Medicaid rules, a life estate is considered an unavailable asset and the underlying residence is not counted in determining the life estate holder's eligibility for the program if more than five years have passed since its creation. Life estates created prior to August 1, 2014 are also protected from the Estate Recovery program, which is designed to recover amounts paid for Medicaid benefits from recipients’ estates following their deaths.
A common question arises if the life estate holder no longer occupies the underlying residence: can the residence now be sold? After all, there are many expenses associated with maintaining a residence, including property taxes, insurance, utilities and maintenance. If the life estate holder left the residence to enter a long-term care facility, then the cost of such care often means there is little income available to pay for such expenses.
Once a life estate has been established, the underlying residence can only be sold if the life estate holder and all other owners agree to the sale. However, prior to any sale, it is important to understand the ramifications for the life estate holder's Medicaid eligibility. While the life estate itself is considered an unavailable asset for Medicaid purposes, the proceeds from its sale are not. Accordingly, if a life estate holder is receiving Medicaid benefits and sells his or her life estate, the resulting sale proceeds could cause him or her to have too many assets to continue to qualify for the program. Alternatively, if the life estate holder does not receive his or her share of the sale proceeds, then under Medicaid rules he or she will be considered to have divested them and this may also disqualify him or her from the program for a period of time.
In light of these Medicaid eligibility issues, it is often beneficial to avoid selling the residence until after the death of the life estate holder. The owners may consider renting the residence to help cover the costs of maintaining it during such time. However, many people do not wish to become landlords and decide to sell the residence anyway while relying on other planning options to deal with the sale proceeds, such as using them to purchase assets that do not count for Medicaid eligibility or contributing the proceeds to a Wispact special needs trust. If the underlying residence is sold and the life estate holder is concerned about his or her eligibility for the Medicaid program, it is important to correctly value the life estate for Medicaid purposes to ensure the life estate holder receives the correct share of the proceeds.
The Medicaid program uses a standard table to value life estates based on the life estate holder's age at the time of sale. The value of a life estate decreases as the life estate holder ages since statistically he or she has a shorter life expectancy during which to use the underlying residence. Accordingly, the older the life estate holder, the less valuable his or her life estate. For example, for Medicaid purposes, the life estate of a 70 year old is worth approximately 60% of the value of the underlying residence, while an 85 year old's life estate is only worth approximately 35%. In the event of a sale, the life estate holder should receive a percentage of the sale proceeds that corresponds to the value of his or her life estate. If the life estate was established more than five years prior to such sale, then the remaining sale proceeds can be divided by the other owners without penalty.
Prior to selling a residence with an outstanding life estate, it is important to understand the Medicaid ramifications of such sale. It is also important to discuss any potential income tax ramifications. Taking the time to consult with a knowledgeable attorney and accountant prior to the sale can help you avoid many of these potential pitfalls.