There are many different ways to proceed when you are planning your estate. In these posts, we endeavor to provide information about all the transfer methods that can be utilized. One of them is a life estate, and we will take a look at this approach here.
The Probate Process
In order to understand why people use life estates, you have to digest some information about estate administration and probate. If you arrange for property transfers through a will, you designate an executor to act as the administrator.
Your executor will admit the document to probate, and the court will supervise during the administration phase. The executor will obtain an Employer Identification Number from the IRS and start an estate bank account. Creditors will be notified, and final debts must be paid.
The executor will inventory the assets and prepare them for distribution to the beneficiaries. Meanwhile, the court will examine the will to determine its validity, and will challenges can be presented during probate.
Significant Drawbacks
This process serves a purpose, but it will take close to a year to run its course in many instances. No inheritances are distributed while the estate is being probated, so the beneficiaries have to wait it out.
Anyone with an interest can obtain probate records, so there is a loss of privacy. Expenses are another negative, and they can consume between three and seven percent of an estate according to a study.
Medicaid Estate Recovery
Now that you understand probate, we can move on to the matter of long-term care. Medicare does not cover the custodial care that nursing homes and in-home caregivers provide. Medicaid will absorb the expenses if you can qualify.
Since it is a need-based program, there is a $1,600 asset limit in Connecticut. However, your home is not counted with an equity limit of $1.097 million in 2025.
There is a Medicaid estate recovery mandate. It requires the state to seek reimbursement from a deceased beneficiary’s probate estate. If you are in direct possession of your home at the time of your passing, Medicaid could put a lien on the property.
Life Estate
Now that we have shared the necessary background information, we can get to the point of this post. You could create a life estate as a homeowner to avoid probate, and in the process, you would protect the property from Medicaid estate recovery.
When you implement this strategy, you name a “remainderman.” For example, you could name your son as the remainderman. You would retain the right to live in the home for the rest of your days rent-free. As a result, nothing would really change in your day-to-day life.
After your death, your son would become the owner of the home. The transfer would not be subject to probate. Since Medicaid estate recovery is limited to probate property, the home would be protected.
Life Estate Drawbacks
A life estate can sound like a good solution on the surface, but there are some potential negatives. You would not be able to sell, rent out, or mortgage the home without the approval of your son.
Even if your son approves of the sale of the home, you would have to split the proceeds based on actuary tables that are kept by the Internal Revenue Service. Plus, creditors of the remainderman could place a lien on their future interest in the home.
Life Estate Alternative
If you want to protect your home from Medicaid estate recovery, there is another option. You could create an irrevocable, income-only Medicaid trust.
When you are establishing the trust, you could transfer ownership of your home to the trust. Income-producing assets can also be conveyed to the trust to stay within the low asset limit.
You would no longer have access to the principal, but you could receive income from the trust’s earnings. If you apply for Medicaid, the principal would not count if you apply at least five years after funding the trust.
After you pass, beneficiaries you name would inherit the assets in the trust. Medicaid estate recovery would not be a factor.
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We can help you implement a nursing home asset protection strategy that will protect your home without taking any risks.
If you are ready to get started, you can schedule a consultation at our Glastonbury or Westport, CT estate planning offices by calling us at 860-548-1000. There is also a contact form on this site you can use to send us a message.
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