Life Estate Deeds vs. Irrevocable Trusts for Medicaid Protection

Written By: Attorney Rebecca S. Spinner, Esq.

Many of the people we meet with come in looking to get help protecting their assets from the costs of long-term care. For most people, their home is their largest asset and the property they most wish to pass on to their children or relatives after they are gone. There are a few strategies that we can use to protect your home from a future Medicaid lien. The two main strategies we use are Life Estate Deeds and Irrevocable Trusts.

The Life Estate Deed

A Life Estate Deed is a deed that transfers your property from your name alone to yourself during your lifetime and then to whom you want to receive it at your death.  A Life Estate Deed where you do not keep any power to sell or convey the property without the permission of the other owners can be used to protect one’s home from the cost of long-term care. This type of deed allows you to maintain ownership of your property during your lifetime while also passing your property directly to the people you want to receive it once you’re gone.  The person or persons who receive the property after your death is called the remainder person(s). This type of deed avoids the probate process and, after five years, protects your home from having to be sold after your death to pay back Medicaid for any benefits paid on your behalf.  If after five years you enter a nursing home and apply for long-term Medicaid benefits, MassHealth will place a lien on the home.  However, after you die, the lien is removed and the remainder person receives the property free and clear.

This type of deed is appropriate if the property is not going to be sold during your lifetime. If you think your house will be sold during your lifetime a life estate deed has some significant drawbacks and risks.  Real property cannot be sold, transferred, or mortgaged without the written permission of all people named on the deed.  If you want to sell your home your remainder person must agree to the sale. If the remainder person doesn’t agree, the property cannot be sold.  If the remainder person is agreeable, most likely to avoid capital gains tax the house will be deeded back into your name.  You would sell the house, buy a new home and put into a new life estate deed.  This restarts the five-year lookback period.

However, If you are in a nursing home and receiving Medicaid benefits when the house is sold then the house should not be deeded back to you.  You would sell your portion of the home and the remainder person would sell his portion of the home.  You will receive a portion of the sales proceeds.  These funds will disqualify you from Medicaid because you will have too much money.  You will then need to requalify for Medicaid by spending the money to pay the nursing home or taking other action to protect the money.  The remainder person will receive portion of the proceeds.   The remainder person will most likely have to pay capital gains tax on the proceeds he or she receives.  After paying the capital gains tax the remainder person can keep the rest of the proceeds and does not have to use the money to pay for your nursing home care.

You cannot change the remainder person without that person’s agreement.  You cannot change the deed even if  the remainder person becomes disabled, dies, angers you, or is getting a divorce.  The property is vulnerable in the event of the remainderperson’s divorce, lawsuit or bankruptcy. A remainder person’s creditor could attach the remainder person’s interest and then just wait for you to die.  Once the remainder person owns the house outright, the creditor can foreclose to collect the debt.

If you don’t plan to sell your property during your lifetime, are not concerned that you cannot change the deed without your remainder person’s cooperation and aren’t concerned about the creditors of your remainder persons, then the Life Estate Deed could be a viable option for you.

The Irrevocable Trust

The Irrevocable Medicaid Protection Trust is a sophisticated trust that is designed to protect your home from the costs of long-term care. Once you transfer your property into an Irrevocable Trust, that property is no longer considered to be yours for Medicaid purposes.  Therefore, no lien should be placed against your property if you ever go into a nursing home and Medicaid pays for your care. Like the Life Estate Deed, there is a five-year period after placing your property into the Trust that you should not apply for Medicaid as the transfer of the property into the Trust disqualifies you from receiving Medicaid benefits.  

The Irrevocable Trust has a lot more flexibility than the Life Estate Deed.  You transfer your home into the trust.  You retain the right to live in the property during your lifetime.  You name someone you trust to administer the trust.  This person is called a Trustee.  The Trustee does not own the property.  The Trust owns the property.  The property is not subject to claims of the Trustee’s creditors.  You name who will receive your property after your death (your beneficiaries).  After your death, the trustee distributes the property to the beneficiaries. There is no probate.  The beneficiaries receive the property free and clear.  If you get mad at the Trustee you can remove him and replace him with a new Trustee.

Unlike the Life Estate Deed, you have the right to change the beneficiaries except you cannot gift the property back to yourself.  This gives you a lot of flexibility to adjust your plans if a beneficiary dies, becomes disabled or has creditor problems.  The trust terms are private and the home is protected from claims of the beneficiaries’ creditors. 

Your Trustee could sell your property if you ever wish to downsize or move, while still maintaining the protection and not restarting that five-year clock.  The sale of the home qualifies for the same capital gains tax exclusion as it would if you owned the property directly.   If the home is sold, the Trustee can purchase a new residence for you to live in.  If there is cash left over or if a new home is not purchased that cash is held in an account in the name of the trust.  It is also protected and does not have to be spent on your nursing home care.

There are some downsides to an irrevocable trust.  You do not have the legal right to demand your home be put back into your name.  Your Trustee cannot write checks to you or for your benefit from the trust, and most often you will not be able to refinance your home, obtain a home equity loan, or get a reverse mortgage while your property is in the Irrevocable Trust.

Which option is right for you?

Which option is best for you, ultimately depends upon your individual circumstances. It is extremely important to speak to an experienced Estate Planning/Elder Law Attorney before executing either of these instruments as they are sophisticated planning strategies that require careful consideration. Our office can help you evaluate the pros and cons of each strategy to figure out which one achieves your goals. Contact us today to set up an appointment to discuss your options!