Question: Ten years ago, my mother transferred her house to me and retained a life estate. Two years ago, when Mom was 84 years old she entered a nursing home as a Medicaid recipient. Her life estate was not counted as an asset for Medicaid purposes. She has been unable to return home and I am no longer able to afford to continue carrying the cost of the home. I would like to sell the house but am unsure of the ramifications. Who is entitled to the proceeds of the sale and how will the sale impact my mother’s Medicaid benefits?
Answer: As long as the house is not sold, your mother’s life estate has no value for Medicaid purposes. However, once you sell the house she will be entitled to a sum of money equal to her life estate interest. For example, at 86 years old, according to the Life Expectancy Table your Mother’s interest in the home is equal to approximately 33%. Assume that the net proceeds from the sale are $330,000.00. Also assume that your mother’s basis in the property (the amount that she paid for it plus capital improvements) is $60,000.00. One third of the net proceeds (1/3 X $330,000.00) will be payable to your mother for her life estate interest. Therefore, once the house is sold and your mother will receive $110,000.00 she will no longer be eligible for Medicaid. Under current Medicaid laws, your mother is not permitted to have more than $13,800.00 in assets. Based upon the calculations, your mother would have to spend down all monies in excess of the $13,800.00. Of course, with proper planning you can utilize some of the sale proceeds to pre-pay a burial, pay some expenses and make other exempt transfers. Nevertheless, it is likely that a substantial portion of your mother’s proceeds would be used to pay for her nursing home care.
It is important to note that should your mother decide not to take the proceeds of the sale of the home, this will still be considered a transfer of the full value and in fact, under Medicaid regulations, will be treated no differently than had she taken the money and the full penalty will be assessed despite her never receiving the money.
Another important consideration in deciding whether to sell your mother’s house is the capital gains tax implications. Since the premise is not your primary residence you are not entitled to a capital gains exemption on your share of the proceeds. Accordingly, there will be Federal capital gains tax (15%) and New York State capital gains tax (7%) payable, which will reduce your share by approximately 22%. Your mother can apply her $250,000.00 capital gains exemption to her share of the proceeds since she lived at the premises at least two of the last five years and no capital gains tax will be due on her share of the proceeds.
One alternative available to you is to rent the home and not sell until you mother’s death. Under the Medicaid rules, you can use the rental income to pay the carrying charges on the premises. These expenses include but are not limited to: real estate taxes, homeowners insurance, utilities, landscaping, maintenance and repairs. Any rental income in excess of the carrying charges will be considered income to your mother in the month received and will have to be paid to the nursing home. This may enable you to hold onto the house and avoid losing a substantial portion of the proceeds to nursing home charges and capital gains taxes.
While life estate interests were used extensively in the early years of Elder Law planning, it is no longer the preferred method of protecting the homestead. Today, more often than not, we utilize Irrevocable Trusts, with their ability to protect the homestead as well as other assets, these trusts offer superior protection and flexibility. There are many nuances in this type of planning and therefore any planning decisions should be reviewed with an experienced Elder Law attorney in order to ensure that you are using the best method for your particular set of facts and circumstances.
By: Nancy Burner & Robin Daleo