SOCIAL SECURITY 2023 UPDATE SSI FOR NYS RESIDENTS Individual $1,001/month Couple $1,475/month MAXIMUM TAXABLE…
A “life estate” is an ownership interest that a person retains in real property while transferring a remainder interest to one or more individuals.
Life estates are sometimes used as a planning technique by individuals who wish to safeguard their residence or other real estate.
For example: Mrs. Smith is worried that one day she will require nursing home care, but she does not want her home to be garnished by Medicaid in order to cover the cost of her care. Mrs. Smith decides to transfer her home to her children. She keeps an interest in the home by retaining a life estate interest, which ultimately transfers the deed to her beneficiaries as “remainder interest owners,” allowing Mrs. Smith to continue living in her house for the rest of her life. It allows Mrs. Smith to keep her exemptions such as the STAR exemption and the Veteran’s exemption. The house cannot be sold without her permission.
When transferring the ownership of a home while retaining a life estate may seem like a sound strategy, it contains hidden pitfalls:
- Selling the property: Once the deed has been transferred to the children, or whoever will hold the remainder interest in the property (the “remainder man”), the life estate owner can no longer sell the property without the consent of all parties.
- Third party influences: After creating the life estate and deeding the property to the remainder man, it becomes subject to their outside influences. If a remainder man is subject to a civil judgment, divorce or death, his interest in the home will likely be affected.
- Tax issues: A life estate holder forfeits the majority of the $250,000 capital gains tax exclusion upon the sale of the home (the tax exclusion is $500,000 for a married couple).
An “Irrevocable Medicaid Asset Protection Trust” is a more prudent estate planning strategy.
The individual(s) can set up a trust and transfer real estate into the trust. They can appoint their child(ren) as independent trustees, however, the child(ren) do not own the property — the trust owns it. If a trustee encounters adverse events such as divorce, creditor problems, or death, the real estate (an asset of the trust) will not be permeated.
The trustor(s) can designate what actions to take if one of the independent trustees predeceases him. The trustor(s) can apply their $250,000 capital gains tax exclusion (or $500,000 for a married couple) and sell the property if they choose to. If the property is sold, the proceeds would become part of the trust. No portion of the proceeds would return to the trustor(s) causing them to be ineligible for Medicaid.
By putting the real estate in a trust, the individual can keep all of the important exemptions that apply to them. They also have the ability to replace and remove the trustees at any time, and a limited ability to change the beneficiaries of the trust.
An Irrevocable Medicaid Asset Protection trust is more flexible than a life estate and offers much more protection.
How will you protect your estate assets?