James Contini: Life estates no longer provide same protection from long-term care costs

Due to changes in Medicaid rules, the once-common practice of utilizing a life estate to protect the value of an individual’s residence from long-term care costs, such as a nursing home or assisted living facility, will no longer protect the full value of an individual’s residence, and in some situations, may cause great difficulty in the individual being able to obtain Medicaid eligibility at all.

In the United States, long-term care costs are not covered by traditional health insurance, such as Medicare. While individuals may purchase a separate long-term care insurance policy to assist with paying for long-term care, the cost of these policies is sometimes too expensive to be a viable option. Because of this, most individuals’ only options are to self-pay or to obtain assistance with paying for long-term care costs by pursuing Medicaid eligibility.

Medicaid is only available to individuals that fall below a certain threshold of countable assets. For a single individual, the individual must have less than $2,000 in countable assets to qualify. Further, the Medicaid eligibility rules contain a five-year lookback provision, which prohibits the individual from gifting assets away during the five years immediately prior to applying for Medicaid. If the individual has gifted assets away during this period, Medicaid will not pay for the individual’s long-term care costs for a certain period of time, depending on the value of the gifts made.

Irrevocable trusts

Because of the five-year lookback, an individual may choose to transfer assets out of the individual’s name to someone, such as the individual’s children (or an irrevocable trust), in the hopes that the individual will not need to obtain Medicaid eligibility until more than five years after the gift takes place.

Because an individual’s residence is often one of the individual’s most valuable assets, it is not uncommon for an individual to consider gifting the individual’s residence for this purpose. If the individual is successful in making it through the five-year time period before needing to seek Medicaid eligibility, the value of the residence, or other assets gifted, will be protected and will not have to be spent on long-term care costs.

Although this strategy may help protect assets, gifting an individual’s residence can be risky, as once the residence has been gifted, the individual no longer has any right to continue to reside in the residence unless permitted to do so by the new owner.

In order to mitigate this risk, an individual used to be able to utilize a life estate, which allows the ownership of a piece of real estate to be split in time. The individual would transfer the ownership of the residence to a child (or irrevocable trust), for example, and retain a life estate. The child (or irrevocable trust) would then own what is called a remainder interest in the residence. The life estate allows the individual to continue to reside in the residence during the individual’s life, but upon death, the child (or irrevocable trust) owning the remainder interest becomes the sole owner of the residence. This protects the individual by ensuring the individual is legally able to reside in the residence until death.

Rules on life estates

Prior Medicaid rules used to treat life estates as having no value, so if an individual owned a life estate, it would not preclude the individual from obtaining Medicaid eligibility. However, the Medicaid rules now treat life estates drastically different and treat the life estate to be worth a certain percentage of the total value of the residence, depending on the age of the life estate owner.

For example, if the life estate owner is 80 years old and the life estate is for a residence with a fair market value of $200,000, Medicaid treats the individual’s life estate to be worth around 43% of the total value of the residence, or $86,000. This puts the individual over the $2,000 countable asset limit, thus making the individual ineligible for Medicaid.

This creates a very difficult situation for individuals who find themselves owning a life estate valued in this manner by Medicaid, as the individual will be required to spend the $86,000, which does not actually exist, before being able to obtain Medicaid eligibility. Further, if the individual terminates the life estate by allowing the residence to transfer to the person owning the remainder interest during the individual’s life, instead of at death, Medicaid will treat that transfer as an $86,000 gift, which violates the five-year lookback.

Due to these complexities, an individual interested in taking proactive steps to protect the value of the individual’s residence or other assets or who currently owns a life estate should seek the advice of an attorney who is familiar with the nuances of the Medicaid rules. I would like to thank Attorney Mark Wagner of my office for assisting with this article.

James F. Contini II is a certified specialist in estate planning, and works for Krugliak, Wilkins, Griffiths & Dougherty Co., LPA, in New Philadelphia.

This article originally appeared on The Times-Reporter: Life estates no longer provide protection from long-term care costs