Retain Life Estate As a Medicaid Planning Technique

Retain Life Estate as a Medicaid Planning Technique (Pros and Cons)

In an ICLE seminar material entitled, Hot Topics in Medicaid Planning, in the chapter entitled “Real Property,” I discussed the possibility of the potential applicant transferring a home to a child and retaining a life estate.

Some of the salient features of such a transaction are as follows:

1. There is a gift of the remainder interest, and such gift becomes subject to the transfer rules of the Deficit Reduction Act. However, if such transaction occurs more than 60 months prior to the date of application, the beneficial factors listed below apply.

2. No value is assigned to the retained interest for resource eligibility purposes. Therefore, a person applying for Medicaid with a retained life estate would not be treated as having a resource for that interest.

3. The basis in the property is “stepped-up” upon mother’s death (Sections 1014 and 2036 of the Internal Revenue Code).

However advantageous such technique may appear, it is important to consider some major stumbling blocks. As indicated in New Jersey Practice, Celentano, ¶4.8, the author points out various financial obligations of the life tenant (i.e. the Medicaid recipient in our hypothetical) which include the duty to keep the property in as good repair as when the estate began.

4. Ordinarily the life tenant is required to pay taxes, make repairs and pay interest on a mortgage. Possibly the life tenant may be required to provide security to protect the interest of the remainderman.

Therefore, a life tenant-Medicaid recipient will have financial obligations. However, if such individual is a Medicaid recipient, the life tenant will not have any funds to pay such obligations since the Medicaid reimbursement rate is to be reduced by social security and pension monies. Notwithstanding, Medicaid has recently adopted the position that pension and social security can be used to pay the life tenant’s obligations.


Disclaimer: This article does not constitute legal advice and each person may have unique facts for which legal consultation may be necessary.
© May 2009, Post 86