How does Medicaid deal with a life estate?

mortgage deed document on table with keys

For New Yorkers receiving benefits under the long-term care Medicaid program, a life estate is a strategic estate planning tool. Maintaining a life estate can ensure that your home passes to your intended loved ones after your death. A life estate is created through a properly drafted and recorded deed or using an Irrevocable Medicaid Asset Protection Trust. A life estate legally transfers the title of the real property or assets to a designated party. But, the original party retains the absolute and exclusive right to live in the house for the rest of their life and must pay related expenses.

Individuals receiving Medicaid long term care benefits are subject to estate recovery for all assets passing through their probate estate. When anyone passes away with assets in their sole name, a proceeding is commenced in Surrogate’s Court. If the decedent received Medicaid long term care, Medicaid may seek to recover money that it paid. The recovery program allows the State to claim any assets in the Medicaid recipient’s estate, including their house. This means that certain assets are not passed to the Medicaid recipient’s loved ones after death.

With a life estate created in a deed or trust, Medicaid does not have a claim against your estate for monies that it paid for services rendered.  The property avoids probate, as it is no longer an estate asset that passes through the court. In this scenario, Medicaid will have to seek reimbursement from other probate estate assets or recover nothing at all.

Which is Better – A Medicaid Asset Protection Trust or a Life Estate Deed?

Although, using a life estate deed to transfer real property is a cost-effective estate planning tool, a trust is the better solution. Some of the disadvantages of a life estate deed are:

  • The real estate may not be the only asset that needs protecting. A deed change may protect the home, but not other assets. A Medicaid Trust can protect any asset.
  • If a deed with a life estate needed to be transferred back to the original owner, the designated party may refuse. For example, if the grantor needed long term care before the look back period ended because the transfer of the deed is considered a gift.
  • The property could be subject to the designated party’s creditors and divorcing spouse. Contrast with a transfer to a Medicaid Asset Protection Trust, where the Grantor would be able to change the trustee and beneficiaries at any time.
  • By transferring via deed, the grantor will lose the $250,000 capital gains exemption if the property had to be sold during the grantor’s lifetime.
  • If the home had to be sold, the sales proceeds would then be an available resource for Medicaid eligibility and for estate recovery.

Discuss the advantages and drawbacks of a life estate with an experienced estate planning attorney. A consultation is critical before transferring an asset as valuable as your home.

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Burner Law Group, P.C.

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