Some Implications Of A Life Estate

Some Implications Of A Life Estate

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By Linda M. Toga, Esq.

The Facts: My father has decided to gift his house to me and my brother and to retain a life estate for himself. This is part of his Medicaid planning.

The Question: What are the advantages and disadvantages of making this transfer?

The Answer: The advantages of putting the house in your names now is that it starts the clock running for purposes of Medicaid benefits that will cover nursing home care. As long as five years pass between when the house is transferred and when your father applies for Medicaid, the full value of the house will have no bearing on your father’s eligibility for benefits. In addition, by retaining a life estate in the house, your father will continue to be eligible for real property tax exemptions such as Enhanced Star and veterans exemptions that he may now enjoy. It is important to note that the life estate has a value which will be taken into consideration when he applies for Medicaid. However, the life estate should not cause him to be ineligible to receive benefits.

The disadvantages of transferring the house to you and your brother outweigh the advantages. First, if the house is sold during your father’s life, he is entitled to receive the value of his life estate. While the life estate itself is not considered an available resource for Medicaid purposes, the cash that he receives from the sale of his life estate will be deemed an available resource which may make him ineligible for benefits.

Second, if you and your brother are gifted the house now, your basis in the house for capital gains tax purposes will be the same as your father’s basis. If, on the other hand, you are not gifted the house now but you inherit the house upon your father’s death, you will get a step up in basis. Assuming your father has owned the house for a long time, getting the step up in basis upon his death will likely avoid significant capital gains taxes when you and your brother sell the house.

Third, if you and your brother own the house, your creditors will be able to attach liens and/or judgments to the property. This will not necessarily decrease the value of the property but, those liens and judgments will have to be paid when the house is sold, regardless of whether that is before or after your father’s death. If your father needs to apply for Medicaid in three years, for example, your father will be ineligible for Medicaid for a period of time based upon the value of the gifted house. If you have to sell the house to cover your father’s expenses during the penalty period, the amount of money you and your brother will have to pay those expenses will be decreased by the amount of any judgments and liens that had to be paid off at the time of the sale.

Clearly, the disadvantages of gifting the house now are significant, and individual circumstances and goals may require differing approaches. There are also other options available to your father. For example, rather than transferring the house to you and your brother now, your father can transfer the property into an irrevocable trust. The trust can provide that the house passes to you and your brother when your father dies. While using a trust will not avoid the five year Medicaid look-back period, it will protect the property from your creditors and result in you and your brother getting a step up in basis upon your father’s death.

In light of the number of issues to be considered, it would be important to discuss this matter with an experienced elder law attorney and/or financial/tax advisor before deciding which option is the best one for your father.

Linda M. Toga, Esq. provides legal services in the areas of litigation, estate planning and real estate from her East Setauket office.