Recently, the rules for Life Estates and asset protection of your home under the New York Medicaid laws have been changed under the new Medicaid Estate Recovery rules. The purpose of this article is explain what a Life Estate is and how it works if you already have one, and give further understanding of how it applies to the new Medicaid law.
What is a Life Estate?
A life estate is created when you transfer your property (by deed) to a remainder beneficiary such as your child, but maintain possession, right to use, and costs of maintenance during your lifetime. This means that the remainder beneficiaries will only take full possession of the property after your death, and until that time you retain all rights to the property.
What are the benefits of creating a Life Estate?
- Simplicity – Life estates are quick, easy and inexpensive to set up. The property transfers immediately upon your death, so that your heirs (the remainder beneficiaries), do not have to wait for a probate proceeding to occur to take title to the property.
- Ownership – The property and house remains yours for life. The property or house cannot be sold or changed without your permission.
- Tax Benefits – There is a great tax benefit for your remainder beneficiaries, such as your children. This tax benefit is called a step up in cost basis. The benefit arises because your chosen remainder beneficiaries will receive the property at the Fair Market Value, without any tax consequences. An example will help illustrate how this works:
- Mary purchased her house in 1982 for $100,000.00. She created a life estate in 2006 and named her only child Claire as the remainder beneficiary. Mary continued to live in the house until her death in 2011. At the time of Mary’s death the house was valued at $600,000.00. The title to the property transferred to Claire at the time of Mary’s death and Mary receives the house and property at a cost basis of $600,000.00.
So why is this so important? It goes back to taxation. If Claire were to sell the house at $600,000.00 she wouldn’t have to pay any taxes (because her basis is equal to the sales price) and she would have $600,000 in her pocket free and clear of any tax. However, if her basis were to remain at $100,000.00 and she were to sell the house for $600,000.00 then she would have a gain (for tax purposes) of $500,000.00 which she would owe a large amount of tax on.
Alternatively, if you were to transfer your property to your heirs during your lifetime then the property may be subject to large amounts of gift or estate tax.
Life Estates & Medicaid:
Currently, under New York Law there is a downside to creating a life estate. That downside is directly correlated with Medicaid. First, when you are applying for Medicaid there is a five-year look back period on any transfers you made. Even though under a life estate you still retain ownership, the remainder beneficiaries do have some interest, and therefore there is a transfer. This means that if you created a life estate within five years of applying for Medicaid, there will be a penalty imposed, which will be determined by the amount of interest the remainder beneficiaries have acquired. Second, under the new Medicaid laws life estates are subject to Medicaid estate recovery. This means that the Department of Social Services will place a claim against your property for the amount of interest you had in the life estate at the moment before your death. This claim will be payable by your heirs, to the Department of Social Services.
Why is this so important? It is crucial that you are aware and understand the higher costs involved in the new Medicaid laws. The new laws have complicated matters and it is essential you speak with our office as Elder Law attorneys to determine the best strategy for you and your estate. We can also other, possibly more prudent options, to protect your assets. As always, we welcome the opportunity to discuss your personal circumstances and determine the best plan for you.
