Tuesday, January 7, 2014

How to Protect Your Assets by Purchasing a Life Estate in Your Child’s Home

A “life estate” is a way of splitting the ownership of a home or other property over time. The person owning the life estate has the right to use and occupy the property for life. That interest ends automatically upon death and full ownership of the property passes to the other owners who hold the “remainder interest.”

Life estates can be a valuable planning tool and are frequently used in elder law planning. A common use involves a parent who wants to “give the house to the kids” while retaining the ability to live in and control the property during the parent’s lifetime. The parent deeds the home to the children but reserves a life estate for him or herself. Upon the parent’s death the property will pass to the children outside of probate and (in Pennsylvania) free from government Medicaid estate recovery claims.

Purchasing a Life Estate

While the most common use of a life estate involves the children owning a remainder interest in the parent’s home, sometimes it makes sense for the parent to purchase a life estate interest in a child’s home. In the right circumstances, the purchase of a life estate can be an effective means to protect a parent’s assets and a child’s inheritance.

For example, a parent may sell his or her home and move in with a child. As part of the arrangement, the parent can purchase a life estate in the child’s home. This transfers cash to the child while giving the parent the legal right to reside in the home for the rest of the parent’s life. The care provided by the child may help the parent remain in a supportive home setting. If a few requirements are met, the cash paid to the child will be protected from the cost of long term care that may be needed by the parent in the future.

Medicaid Eligibility

The purchase of the life estate interest can help the parent spend down to the level needed to qualify for public benefits like Medicaid. Medicaid is the primary source of government payment of long-term care costs in the United States. It can provide the extra financial help needed to keep a parent at home, or pay for nursing home care if that is someday required.

An outright gift of funds from parent to child will usually make the parent ineligible for Medicaid long-term care benefits. Medicaid penalizes gifts made within 5 years of an application for long-term care assistance. But an appropriate purchase of a life estate in a child’s home will be treated as a purchase for value not a gift, with no Medicaid penalty involved.

Medicaid laws encourage this type of life estate - family caregiving arrangement. Federal law [42 U.S.C. § 1396p(c)(1)(J)] establishes the criteria under which the purchase of a life estate will avoid treatment as a penalized transfer of assets. A parent’s purchase of a life estate interest in a child’s home does not constitute a transfer of assets if the purchase price is fair and the parent resides in the home for at least one year af­ter the date of purchase.

This means that, in the right circumstances, a parent can use available funds to establish a caregiving arrangement, reward the caregiver, and protect a child’s inheritance from the parent’s nursing home costs. The child will be able to keep the funds the parent pays to the child to purchase the interest in the child’s home. Provided the purchase is for fair value and the purchaser moves into and lives in the home for at least a year, the purchase will not be deemed to involve a transfer of assets for less than fair consideration. This means it won’t affect the parent’s eligibility for Medicaid. The purchase price will be protected from the parent’s long term care costs.

At the death of the parent, the child will again become the sole owner of his or her home. The parent’s interest in the home will be extinguished without the need to go through probate or other legal proceeding. Estate recovery should also be avoided under current Pennsylvania rules. And Pennsylvania inheritance taxes may be reduced as well.

There are Traps for the Unwary 

Before you engage in this type of planning, be sure that it meets your family situation and needs. Also, be sure to carefully consider the tax and other non-Medicaid issues that may arise before you complete the transaction. The parent must legally reside in the child’s home and the change of residence should be fully documented in the parent’s driver's license, tax returns, and election records.

Albino v. Shah

It is important to remember that the parent must reside in the child’s home for at least one year to avoid Medicaid transfer of asset penalties. A recent New York case illustrates this point. The case is Albino v. Shah (N.Y. Sup. Ct., App. Div., 4th Dept., No. 1152 TP 13-00733).

Frances Albino resided on Diffin Road in Cicero, New York. In July 2007 her daughter and grandson purchased a home located on Lakeshore Road in Cicero. Three months later, in October 2007, Frances purchased a life estate in the Lakeshore Road home for $70,000, paying $35,000 each to her daughter and grandson. She still owned her interest in the Diffin Road property (which she did not sell until November 2009).

In November 2008, approximately 13 months after she had purchased the life estate in the Lakeshore Road home, Frances became a resident of an assisted living facility. In January 2010 Frances fell and broke her hip and ended up in a nursing home. Frances initially paid privately for her nursing home care, but she soon ran out of funds and applied for Medicaid payment of her costs of care.

The state of New York denied Frances request for Medicaid and declared that she was ineligible for 14.46 months due mainly to the purchase of the life estate in 2007. The state said that the purchase of the life estate must be treated as a gift. It could not be treated as a purchase since Frances could not prove that she had resided at the Lakeshore Road property for the required 12 months.

The state pointed out that Frances had listed the Diffin Road property as her address on her 2007 and 2008 income tax returns, and that her driver’s license and voting registration still listed her as residing on Diffin Road. Even though she had owned a life estate in Lakeshore Road for more than 12 months when she entered assisted living, she did not reside there for that period of time. Without adequate proof of residency, the purchase must be treated as a gift.

Based on these facts, the Appeals Court upheld the state’s determination, and found that Frances was ineligible for Medicaid help in paying her nursing home costs.

For more information on getting Medicaid benefits for nursing home care see Marshall, Parker and Weber’s Nursing Home Guide booklet. For information on Medicaid estate recovery see Marshall, Parker and Weber’s booklet The Medicaid Death Tax.

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