By Ronald A. Fatoullah, Esq. and Junel Abreu, Esq.
When an individual receives Medicaid, he or she is subject to estate recovery. In other words, the state can recover benefits it paid on behalf of the Medicaid recipient from the individual’s estate. Commonly, a Medicaid recipient’s largest asset is his or her home. There are some strategic estate planning tools that can be used to protect one’s home.
One such tool is the creation of a life estate. A life estate is joint ownership of property between two or more people for different periods of time. The life estate allows an individual known as the “life tenant” the exclusive right to live on the property for the rest of his or her life. The other owner of the property is known as the “remainderman.” The remainderman cannot take possession until the end of the life estate, which occurs upon the death of the life tenant.
When the life tenant dies, the house will avoid going through probate, and ownership of the property will pass automatically to the remainderman. Although the property is not part of the individual’s probate estate, it will be included in the individual’s taxable estate. This means that depending on the size of the estate and the state’s estate tax limit, the property may be subject to taxation. However, there can be a reduction in tax on the capital gains when the remainderman sells the property. The remainderman will receive a “step up” in the property’s basis.
Another commonly used estate planning tool is the creation of an irrevocable trust. This option requires that the house be transferred into the irrevocable trust. When the house is transferred, it cannot be removed from the irrevocable trust. If the house is sold, then the proceeds of the sale must remain in the irrevocable trust.
Both estate planning tools (the life estate and irrevocable trust) can trigger a Medicaid ineligibility period of five years. A transfer penalty can occur if a life estate is purchased in another home but can be avoided if the purchaser of the life estate lives in the home for at least one year after the purchase and pays an appropriate amount for the life estate. Every strategic estate planning tool has it benefits and pitfalls. It is important to consult with a knowledgeable estate planning attorney to determine which tool best meets your needs.
Ronald A. Fatoullah, Esq. is the founder of Ronald Fatoullah & Associates, a law firm that concentrates in elder law, estate planning, Medicaid planning, guardianships, estate administration, trusts, wills, and real estate. Junel Abreu, Esq. is an attorney with the firm. The law firm can be reached at 718-261-1700, 516-466-4422, or toll free at 1-877-ELDER-LAW or 1-877-ESTATES. Mr. Fatoullah is also a partner with Brightside Advisors, a wealth management firm with offices in New York and Los Angeles.
This summary is not legal advice and does not create any attorney-client relationship. This summary does not provide a definitive legal opinion for any factual situation. Before the firm can provide legal advice or opinion to any person or entity, the specific facts at issue must be reviewed by the firm. Before an attorney-client relationship is formed, the firm must have a signed engagement letter with a client setting forth the Firm’s scope and terms of representation.