Life Estate Rule Made More Restrictive
Prior to August 2008, the Virginia Medicaid State Plan treated life estates in real property as exempt resources, meaning that the ownership of a life estate did not affect Medicaid eligibility. Effective August 28, 2008, the aforementioned change in Medicaid policy made life estates created after that date countable resources under most situations, though subject to the same exclusions that apply to other residential real estate (e.g. the home subject to the life estate would be exempt if the Medicaid Applicant, or a spouse or dependent child, was living in the home or the Medicaid Applicant was using “reasonable efforts” to sell the property interest, or during the first 6 months of institutionalization provided the Medicaid Applicant intended to return home).

The American Recovery and Reinvestment Act of 2009 (Recovery Act) that President Obama signed into law on February 17, 2009 provided increased federal funding for state Medicaid programs. To be eligible for the enhanced federal financing, states may not have eligibility standards, methods or procedures in place that are more restrictive than those effective on July 1, 2008. States that implemented more restrictive policies after July 1, 2008 had until July 1, 2009 to reverse these restrictions to receive the increased funding.

More Restrictive Life Estate Rule Rescinded
The August 28, 2008 change in Virginia Medicaid policy regarding life estates created a more restrictive eligibility standard than was in existence in Virginia on July 1, 2008. Therefore, in order for Virginia to qualify for the increased federal funding, the more restrictive life estate policy needed to be reversed. As of May 15, 2009, the more restrictive life estate policy was rescinded. Accordingly, we now have two diferrent Medicaid rules for life estates, depending on the date that the life estate was created:

* As a general rule, life estates created prior to August 28, 2008, or on or after February 24, 2009, are considered exempt assets.
* Life estates created on or after August 28, 2008, but before February 24, 2009, are treated in the same manner as other real property, subject to any applicable residential real property exclusions as mentioned above.

How Can Life Estates Now Be Used in Medicaid Asset Protection Planning?
Life estates have been used throughout Virginia history for many different purposes – Medicaid asset protection planning, estate planning, probate avoidance, and tax planning.

One asset protection strategy involves a parent purchasing a life estate in the home of a child. This strategy is specifically allowed by Medicaid under current law so long as the parent actually resides in the home for at least a year after the purchase of the life estate.

Another planning strategy involves the sale of real estate to a child, coupled with the retention of a life estate. This allows the parent to effectively sell the home for a discounted value, retain the lifetime right to live in the home, and avoid probate, while also preserving a step-up in basis for capital gains purposes on the death of the parent.

A third planning strategy involves the gift of real estate to a child, coupled with a retained life estate. Although this gift will trigger a period of Medicaid ineligibility if application for Medicaid is made within five years of the transfer, because the value of the remainder interest is lower than the full value of the entire piece of real estate, a gift of a remainder interest results in a shorter Medicaid penalty period than a transfer of the entire house.

A parent retaining a life estate in a home that is being sold or gifted to a child has several advantages:

1) The parent continues to qualify for any property tax exemptions such as senior citizens exemptions that were available prior to the transfer.
2) The parent retains the legal right to live in the property.
3) The parent retains the legal ability to obtain a reverse mortgage (with the agreement of the remainder beneficiary).
4) The child receives a stepped-up basis for capital gains tax purposes.

Life Estate transactions, and the financial and life expectency calculations that must be made in connection with these transactions, are extremely complicated and must be done pursuant to the applicable Medicaid regulations. It is essential that these types of transactions be done under the direct supervision of an experienced Elder Law firm such as the Farr Law Firm.

Life estates have been used throughout Virginia history for many different purposes – Medicaid asset protection planning, estate planning, probate avoidance, and tax planning. This significant new change in the law, once implemented, will negatively affect many Virginians wishing to protect their homes from the devastating expenses of long-term care.

A Call to Action

Because DMAS has not yet amended the State Medicaid Plan, Medicaid still considers a life estate as an exempt resource, but this will soon change. If you own a home, or live with a child in the child’s home, and have been considering Medicaid Asset Protection, it is imperative that you contact us today. Together we can determine whether a life estate fits your long-term care planning needs.

What Is a Life Estate?

A life estate in real estate is a type of “split interest” ownership somewhat similar to a timeshare. If you own a timeshare, you have the exclusive right to use your timeshare property during your period of ownership, typically a certain week each year. If you own a life estate, you have the right to live in the property for the rest of your life, and your ownership interest terminates upon your death.

As of today, a life estate is still considered an “exempt asset” for Medicaid purposes, meaning you can own a life estate and still get Medicaid. However, the window of opportunity will soon be closing, though at this point we don’t know exactly when.

How Are Life Estates Used in Medicaid Asset Protection Planning?

One Medicaid planning strategy involves the sale of real estate, coupled with the retention of a life estate. For example, a mother can transfer a home to her daughter by deeding the property to the daughter with the mother keeping a “retained life estate.” This allows the mother the right to live in the home for her remaining lifetime and to be considered the owner of the home for most purposes.

Another Medicaid planning strategy involves a parent purchasing a life estate in the home of a child. Medicaid allows these asset protection techniques so long as the parent actually resides in the home for at least a year after the transaction.

A third Medicaid planning strategy involves the gift of real estate, coupled with a retained life estate. A gift of this nature (technically called a gift of the “remainder interest”) has many advantages over an outright gift of real estate. A few of the advantages are:

1) The parent, as owner of the life estate, continues to qualify for any property tax exemptions such as senior citizens exemptions that were available prior to the transfer.
2) The parent will not lose the legal right to live in the property.
3) The recipient(s) of the property receive a stepped-up basis for capital gains tax purposes.
4) Since the value of the remainder interest is lower than the full value of the entire piece of real estate, a gift of a remainder interest results in a shorter Medicaid penalty period than a transfer of the entire house.

Life Estate Deeds and the calculations that must be made in connection with the purchase or sale of life estates and/or remainder interests are extremely complicated, and should only be done by an experienced elder law attorney such as Evan Farr, and in connection with a comprehensive Asset Protection Plan.

If you own a home, live with a child in the child’s home, or are planning to live with a child in the child’s home in the future, please contact us today for a consultation to determine whether a life estate is right for you.