Minnesota Medicaid: Do Life Estates Protect Real Estate from Medical Assistance and Probate?
The phrase "life estate" often comes up in discussions of estate planning, probate and Medicaid planning, but what exactly does it mean? A life estate is a form of joint ownership that allows one person to remain in a house until his or her death, when it passes to the other owner. Life estates can be used to avoid probate and to give a house to children without giving up the ability to live in it. They also can play an important role in protecting your assets from Medicaid.
In a life estate, two or more people each have an ownership interest in a property, but for different periods of time. The person holding the life estate - the life tenant - possesses the property during his or her life. The other owner - the remainderman - has a current ownership interest, but cannot take possession until the death of the life estate holder. The life tenant has full control of the property during his or her lifetime and has the legal responsibility to maintain the property as well as the right to use it, rent it out, and make improvements to it.
When the life tenant dies, the house will not go through probate. Instead, the ownership passes automatically to the holders of the remainder interest.
Protection from Long Term Care
Because the property is not included in the life tenant's probate estate, it can reduce or limit Minnesota's Medicaid estate recovery (called "Medical Assistance"). Minnesota will likely place a lien on the property to recoup Medicaid costs, however, the lien will be for the value of the life estate, not the full value of the property.
Caught in Minnesota's Tax Net
Although the property will not be included in the probate estate, the life tenant's portion will be included in the taxable estate. Therefore, this may not be the most attractive option for individuals who have an estate worth more than $1.6 million (Minnesota's estate tax exemption which is increasing to $2 million by 2018). Depending on the size of the estate and the state's estate tax threshold, the property may be subject to estate taxes of 16%.
Control of the Property
The life tenant cannot sell or mortgage the property without the agreement of the remaindermen. If the property is sold, the proceeds are divided up between the life tenant and the remaindermen. The shares are determined based on the life tenant's age at the time - the older the life tenant, the smaller his or her share and the larger share of the remaindermen. Therefore, the SOONER this is implemented, the more equity which will be protected.
Five Year Look-Back for Minnesota Medical Assistance
Be aware that transferring your property and retaining a life estate can trigger a ineligibility period if you apply for Medical Assistance within five years of the transfer. Purchasing a life estate should not result in a transfer penalty if you buy a life estate in some else's home, pay an appropriate amount for the property and live in the house for more than a year. For example, an elderly man who can no longer live in his home might sell the home and use the proceeds to buy a home for himself and his son and daughter-in-law, with the father holding a life estate and the younger couple as the remaindermen. Alternatively, the father could purchase a life estate interest in the children's existing home. Assuming the father lives in the home for more than a year and he paid a fair amount for the life estate, the purchase of the life estate should not be a disqualifying transfer for Medicaid. Voila! One last little loophole to transfer assets within the five year period in Minnesota. Just be aware that your attorney needs to be well-versed in this area, follow specific IRS rules or run afoul.
Remember the key is ADVANCE PLANNING! The sooner you implement, the more your asset is protected. To find out if life estates, or alternate tools are the right tool for you contact your DeWitt attorney.
About the Author
Susan is an experienced Trusts & Estates Attorney at DeWitt. She works closely with business owners, professionals, families and individuals to ensure assets are protected from long term care costs, creditors, divorces, bankruptcy, litigation and taxes through thoughtful elder, estate and business succession planning. She also does guardianship and conservatorship law.
Contact Susan by email or phone (612) 305-1436.
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