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.