PROTECT YOUR HOME FROM MEDICAID LIENS (PART 3)
Last month and the month before, I explained how to protect your home from Medicaid liens. In my April column, I described how a parent can transfer the family residence to the children, and keep a “life estate.”
The life estate allows the parent to continue to live in the home for life. If the parent goes into a nursing home and receives Medicaid help, the government can still put a Medicaid lien on the property. The lien is like a mortgage. The government uses it to secure repayment of all the payments it made to the nursing home on behalf of the Medicaid recipient. However, the Medicaid lien attaches only to the life estate. When the parent dies, the life estate disappears. The children then receive the property free and clear of the lien. I know this works. Our law firm has used this technique for hundreds of clients. When the client passes away with a Medicaid lien on the life estate, we contact the Attorney General’s office, prove to them that their lien was only on a life estate and that the life estate holder has died, and ask them to remove the lien. So far we have been successful 100% of the time.
Some people have concerns about the life estate. I will now discuss some of these concerns. Suppose mother transfers the residence to daughter and reserves a life estate. What happens if the daughter dies first? The first problem is that if the daughter dies, her ownership interest in the residence will have to go to court for probate. That problem is easily solved. Instead of having mother transfer the property directly to her daughter, have the daughter first set up a Revocable Living Trust for herself. Then mother can transfer the property to her daughter’s Revocable Living Trust, and keep a life estate for herself. If the daughter happens to die first, there will be no probate.
A more serious problem is this: what if the daughter dies first and her share of the property goes to her husband, who remarries? When he dies, it goes to his new wife instead of to the grandchildren. Or what if the daughter has a car accident and is sued, or has serious financial problems or goes through bankruptcy? The daughter’s share of the property is taken away by a creditor, and when mother dies, the property goes to the creditor. Or what if the daughter gets a divorce, and the divorcing husband tries to go after part of the property?
Don’t worry! There is a way to protect against these problems. This is what you can do. Instead of transferring the property directly to your son or daughter, set up an irrevocable trust. Your son or daughter can be trustee of the irrevocable trust. You transfer your property to the irrevocable trust, but keep a life estate. The irrevocable trust can say that if your daughter dies before you, the property goes to her children rather than to her husband. The trust can also protect the property from divorce. The irrevocable trust can also say that if the son or daughter is sued, the person suing the son or daughter cannot touch the property in the irrevocable trust. The parent can safely live in the house all of his or her life. When the parent dies, then the property is transferred from the irrevocable trust to the child or children inheriting the property. If you prefer, the trust can be a “generation skipping trust” and keep protecting the property for the child in case the child gets a divorce or dies with lots of assets.
If you have been afraid to use the life estate technique because child might die, get divorced, or be sued, there is no need to worry. You can transfer your residence to an irrevocable trust, keep a life estate, and sleep peacefully at night.
OKURA & ASSOCIATES, 2010
ESTATE PLANNING ATTORNEYS
My mother’s assets which consist of a home and rental property was placed in a Revocable Trust 10 years ago. She suffered a stroke 2 weeks ago may need to go to a nursing home. From reading your excelent artilces it seems we have no other alternative but to sell her property to pay for her care.
What would be the best way to do this?
@Glenn – A rental home, unless it has a large mortgage and little equity, would likely have enough value to disquality mother from obtaining Medicaid assistance for nursing home costs. Also the fact that the home property is in a revocable trust would probably disqualify her. It may be possible to sell one property but save the other, or depending on the facts, it may be necessary to sell both. Medicaid Eligibility Planning is a complex process that requires analysis of many different factors. Relevant factors may include: the value of the home, the amount of any mortgages on the home, the value of the rental property, the amount of any mortgages on the rental property; what other assets mother owns, and their value; the amounts of debts mother has; whether she has transferred assets for less than full fair market value during the last 5 years; who lives in the home with her, the relationship of persons living in the home with her, and how long they have been living there; whether she is considered competent; if she is not considered competent, whether her power of attorney and trust were drafted in such a way as to allow Medicaid planning, etc. I would highly recommend a Medicaid Eligibility Consultation, which is not a full Medicaid Eligibility Plan, but rather an analysis of all relevant facts to determine whether anything can be done to protect any of mother’s assets, and if so, what some options might be for asset protection. In many cases, after a Medicaid Eligibility Consultation, it turns out that a significant amount of the incapacitated person’s assets can be saved, even if little or no advance planning had been done. If you have not yet done so, I suggest you contact the Okura & Associates office nearest you for a consultation with an experienced Medicaid Planning Attorney to see where you stand with your mother’s situation.
I read your artice and it was very informative. I live in NY state is what you are saying about a life estate lien being released after the life estate being released good there to.
@ James – The law regarding life estates generally applies all over the United States and goes back to England several centuries. However, the way the federal law (and several states’ laws) define the “estate” from which the government can collect back its Medicaid payments after the recipient dies, it sounds as if the government could go after some of the property even after the life estate holder dies. For any state to try to do this would be going against several centuries of English and American law. The State of California considered taking this position several years ago, but decided against it. Just to be safe, you should check with a Medicaid planning expert in New York, to make sure New York has not decided to interpret its law aggressively. In Hawaii, the law is written like the federal law, making it sound like the government can go after property after the Medicaid recipient dies, even if the recipient only owned a life estate in the property. Just to be safe, our law firm has invented a special technique to guard against the possibility that Hawaii might try to change its practice and start going after property in which the Medicaid recipient only owned a life estate.
Little different twist. Mother has life estate since 1977. Brother’s name is on deed. Brother in nursing home but has now lost his Medicaid because “he owns property.” Shouldn’t her life estate trump his “ownership?” We are in Virginia.
@Rebecca – Based on the information you provided, it appears that your mother owns the life estate and your brother owns the remainder interest. Even though the remainder interest owner does not have the right to use the property until the life estate holder dies, the remainder interest owner actually has a vested ownership right in the property. Unlike a beneficiary named in a will or revocable trust, the remainder interest owner’s right cannot be changed or taken away by the person who gave him that right. Therefore, the Medicaid office is probably justified in claiming that your brother owns property. However, he may be able to request a hardship exemption or otherwise plead for mercy on the grounds that it is very difficult to turn the remainder interest to cash. It is difficult to find anyone to buy a remainder interest, because most people are not willing to pay for property which cannot be used until the life estate holder dies. Of course,almost anything can be sold if the price is low enough, so if he cannot get mercy from the Medicaid office, he may have to offer the remainder interest for sale, and keep lowering the price until someone is willing to buy it. The problem is that the sale price will probably be lower than the fair market value, which is calculated by the IRS according to their tables and which is calculated by the Medicaid office according to their table. The Medicaid office could then declare that a Medicaid penalty should be imposed for selling the asset for less than fair market value. Your brother would then have to argue that it was sold for fair market value because no one was willing to pay more. Sorry, but this is not a simple situation for your brother. Good luck to your family.
I own my home myself but my Mother lives with us. We did a life trust on the deed in her name so our property taxes would be cheaper. But the property is mine and in my name. If she has to go into a nursing home will this allow Medicaid to put a lein on my home? If so I need to have the life trust removed. Thank you
It sounds like you gave a life estate to your Mother so she is also an owner on the deed to your home. If she does go to a nursing home and does quailfy for Medicaid to help pay for her care in the future, the State will be able to put a lien on your home then. However, these are the results under current law: (1) The lien would only attach to your mother’s life estate interest; (2) As long as you don’t sell the home (and she does not sell the life estate) while she is alive, they will not collect on that lien; and (3) After she passes away, if you can prove to the Attorney General’s office that the lien was only on her life estate, they will remove the life estate without recovering any value from your home. It is possible that the law could change, but there are other things that we can do just before the time she enters the nursing home to help protect you.