One important question we have been asked by clients is why they would ever need to transfer their residence into a trust? One of the most common reasons is to protect your home from estate recovery by Medi-Cal. If there is a Medicaid lien against your estate at the time of your death, then your heirs will lose your house. However, if you understand how to protect your home from estate recovery through appropriate Medi-Cal planning, you could avoid this unfortunate consequence. This article will explain some of the asset protection and Medi-Cal planning strategies that can work, including Medicaid trusts and life estates.
Some Asset Protection Strategies to Consider
One Medi-Cal planning technique that our attorneys suggest you consider is using a Medicaid trust, which is very flexible. Another common strategy is transferring title of your home to a relative or loved one while retaining for yourself a life estate in the home. That essentially means creating a deed with a retained life estate. There are benefits and disadvantages to this method.
Deciding Whether to Use a Medicaid Trust or a Life Estate
Considering both the advantages and disadvantages associated with a life estate, there is still a choice to be made between an irrevocable Medicaid trust and a life estate. A primary consideration should be the effect of the various legal issues and the personal goals of the client. Before making this important decision, you should discuss all of your options with one of our Los Angeles Medicaid attorneys.
Understanding How a Life Estate Can Help
With a life estate, the estate holder has the absolute and exclusive right to continue to live in the home for the remainder of their lives, even though the property is owned by someone else. With this strategy, the senior can remain in their home without fear of being evicted by the remainder owners of the estate. A Medicaid trust may be able to accomplish the same result. The life estate holder also has the right to rent the property out during his or her lifetime, which is also similar to Medicaid trusts.
What are the Probate and Tax Benefits of a Life Estate
In addition to being able to live in your home after transferring ownership of it, a life estate also allows your property to avoid probate upon your death. That is because, much like a Medicaid trust, the property passes by operation of law. Since the home avoids probate, the home will also avoid estate recovery under the current Medicaid estate recovery laws. Another benefit is that a life tenant can retain the tax advantages from the real property. Upon the death of the homeowner, the property will receive a step-up in basis for tax purposes which is beneficial in terms of capital gains taxes imposed on remainder beneficiaries.
Life Estates and Medicaid’s Look-Back Period
One thing to remember is that, when you transfer the property, it becomes subject to Medicaid’s five year look-back period when applying for coverage of nursing home care. As a result, the sooner you transfer your property to a life estate, the sooner you will become eligible for Medicaid coverage. The same is true when using a Medicaid trust. However, the length of the penalty period is shorter when you use a life estate as opposed to a Medicaid trust because the value of the life estate is deducted from the amount gifted. Life estates are also cheaper and easier to create.
Disadvantages of Using a Life Estate
Using property included in a life estate is somewhat limited. For example, once the property has been transferred, it cannot be sold without the consent of the remainder owners. You must also relinquish the right to change who the remainder owners will be. This is unlike a trust, with which you can retain the limited power of appointment and modify the beneficiaries at any point. Immediately after transferring the property it becomes an asset of the remainder beneficiaries, but it will also become available to creditors. Another issue to consider is that when property is transferred to a life estate, it becomes a completed gift for tax purposes. That means the gift taxes will be imposed at the point of transfer.
Join us for a FREE seminar today! If you have questions regarding estate planning, trust contests, or any other trust administration issues, please contact the Schomer Law Group either online or by calling us in Los Angeles at (310) 337-7696, and in Orange County at (562) 346-3209.
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