Elder Law Center
One Essex Street
Saugus, Massachusetts 01906
Telephone 781.233.4444 Fax 781.231.2222
On July 23, 2004 the Legislature repealed the expanded estate recovery. Under the expanded estate recovery, if someone had been in a nursing home, the Commonwealth could recover against the actuarial value of the life estate upon the death of the nursing home resident. Now, the Commonwealth may only recover against the probate estate. This means that Life Estate’s will once again be a favorable method of transferring real estate that protects the elder’s right to occupy their residence, while protecting it from nursing home costs.
Creating a Life Estate is considered a gift by MassHealth (Medicaid). You are keeping the right to live in the property for the rest of your life and giving away the right to the property after your death, the remainder. Because you may not give away all of your assets and immediately qualify for MassHealth, a disqualification period is assessed for making the gift.
To determine the disqualification period, the starting point is the assessed value of the property. Life estate tables are then used to determine the value of the Life Estate and the remainder. We take the remainder, which is the gift amount, and divide it by $267. The result gives you the number of days you are disqualified for. Because this is a straight gift and no trust is used the maximum disqualification period is three years.
CLICK HERE to view the life estate tables that MassHealth uses to determine the amount of the gift when a life estate is used.
LAW CHANGE EFFECTIVE 2-8-06
Under the Deficit Reduction Act of 2006 (DEFRA)The penalty as computed above will not start until you are either in a nursing home or have less than $2,000, whichever occurs last. This effectively eliminates the possibility of saving the home under this plan unless the transfer was made over 5 years ago, the new lookback period under DEFRA. Because of the increase in the lookback period, life estates will no longer be as widely used as they have been. Transferring your home to an irrevocable trust will be the preferred method of protecting the home.
Let’s take the example of Jack & Jill, who are 68 and 70 years old, respectively. Their home is assessed for $300,000. If Jack & Jill gave their home to Sonny, they would be disqualified for the maximum period of three years ($300,000/$244=1,230 days or approx. 41 months). If they had selected the life estate their disqualification period would be reduced to 244 days or just over 8 months, a savings of 2 years and about 4 months. This can be a tremendous help when one of the spouses is not in the best of health.
The life estate tables for single individuals are not as generous as the joint life estate tables. Let’s take the same example but assume that Jack has already passed away and only Jill is left. Jill is 70 years old and her house is assessed for $300,000. Jill is treated as having made a gift of $118,434 which works out to just over 16 months of disqualification. This isn’t too bad either, we’ve reduced the disqualification period from 3 years to just over 16 months.
So, now that we know that creating a life estate can reduce the MassHealth disqualification period, what are the pros and cons? There are a lot of pros for a life estate:
· To start with, the right of the elder to stay in the house is protected. No matter what happens to the remaindermen, marriage, divorce, bankruptcy…the right to stay in the house is protected.
· The home avoids probate
· The children (remaindermen) receive a step-up in basis upon the death of the parent(s) and can sell the property tax free (if the parents die before 2010, this is discussed later under the repeal of the estate tax).
The problems with a life estate are as follows:
· If the property is sold during the life of the elder, the proceeds are divided upon the sale. This means the elders get a portion of the proceeds and the children get a portion of the proceeds. These amounts are determined in the same fashion as above, using actuarial tables. This generally means that the children will have to pay income taxes on the proceeds they receive. If the elder is in a nursing home at the time of the sale, their share will be subject to a lien by the Commonwealth for past nursing home costs.
· If the elder needs nursing home care and the house becomes vacant, it becomes an insurance nightmare. All standard homeowner insurance policies are void if the home is vacant. Insurance is available for vacant property, but it is very expensive.
· Unexpected death of a remainderman. If you had reserved a life estate and your child had predeceased you, you might end up with the in-laws owning your home, where you might have wanted it to go to your grandchildren instead.
In 2010, the estate tax is scheduled to be repealed and a new system of allowing some of the assets of a decedent that have been inherited to be sold with a step-up in basis. In order to get a step-up in basis under the new proposed law, the property must pass by reason of death. What this means is that if you die after 2010 and you had a life estate, the remaindermen will not receive a step-up in basis and will have a carry-over basis from you. What ever you paid for the property will become their cost. Had the property been transferred to an irrevocable income only trust, they would have gotten a step-up in basis and could sell the property tax free.
The ideal candidate for the life estate is someone who says, “I plan on living her for the rest of my life and would never sell!!!”. Other appropriate candidates are those who are ill and need the reduction in the disqualification period afforded by the life estate.
This article gives general information and not specific advice on individual matters. Persons wanting individualized advice on matters discussed should contact an advisor experienced in those matters. To the extent this article provides information on legal matters, it is based on law in effect in Massachusetts on the date of posting (laws in effect in other states are often quite different).
Ronald H. Surabian is a CPA and attorney who works at the Elder Law Center in Saugus, Massachusetts. He also holds a masters in accounting and a masters in tax law. He currently serves on the board of directors of the Massachusetts Chapter of the National Academy of Elder Law Attorneys. If you have any questions please call me at the Elder Law Center, One Essex Street, Saugus, MA 01906 (781)233-4444. To view this or any prior article, please visit our web site at www.elderlawcenter.org
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