Using a Life Estate to Protect Your Home

In News by Michael Mangini

Long-term care in New York is expensive. In fact, most can’t afford to privately fund it more than a few months.

Per New York’s Department of Financial Services, nursing homes cost between $340 and $390 per day in the Metropolitan area. That’s more than $10,000 a month ($124,100 per year) in Northern Metro, or nearly $12,000 a month ($142,350 per year) on Long Island!

Fortunately, if a New Yorker qualifies for Medicaid while in a nursing home, she need only contribute her Social Security and other income to costs. Medicaid will cover the rest.

However, many New Yorkers don’t know that upon the patient’s death, the State seeks full reimbursement of everything it paid to the nursing home. Essentially, the government has made an interest-free loan, and now it wants repayment.

Medicaid Asset Limits

The average nursing home patient spends about 2.5 years in a home. That means the average patient on Long Island, for example, can expect to run up a bill of about $355k.

Just how does an estate reimburse hundreds of thousands of dollars to the government? After all, a NY Medicaid recipient, by definition, has only around $15k (or $22k per married couple) of “countable assets”.

First, understand that not every asset is a “countable asset”. Qualified retirement accounts, vehicles and- most important to our discussion today- a primary home worth less than $893k, are all considered exempt. Thus, a New Yorker could own an $800k home and hefty retirement, yet still qualify for State assistance with nursing home costs.

But, there’s a twist. The home exemption more or less vanishes when a Medicaid recipient dies. That means the State will expect reimbursement of its payments from the sale of the decedent’s home.

Protecting a Home from Medicaid

It’s important to know that New York State may only assert a lien against probate assets. Probate assets do NOT include property that passes to a named survivor automatically by law. This might included certain real estate, joint bank accounts, or life insurance policies. Therefore, if a home passes outside of probate, then the State is out of luck.

A popular DIY method for avoiding probate is to simply give the house to children outright. But, a major downside to this is that a transfer could trigger an immediate tax burden. Of course, it also entails a loss of ownership/control by the parent and her spouse. Finally, the family could lose the home if a child were to divorce, or suffer some other lien or judgment. 

The solution is a “Life Estate.” That’s where a parent continues to exercise possessory and ownership rights over the home as long as they live. The child then becomes a possessory owner upon death of the parent.

Here’s the best part. The New York State Department of Social Services recognizes that a Life Estate is not the same as total ownership by a parent. Instead, DSS considers it a “limited interest in real property.” 

Thus, Medicaid cannot put a lien on the property after the death of a recipient!

The Medicaid Look-Back Rule

All of the above seems like a clever end-around the New York Medicaid Law. With a valid Life Estate, a person of comfortable means could receive State-sponsored long-term care, with no consequences to their wealth. Seems too good to be true, right?

Well, as with anything that seems too good to be true, there are qualifications and limits. All the more reason why it’s important to work closely with estate planning attorneys when trying to make this work.

The Medicaid Look-Back Rule is one major hurdle. A “look-back period” is a defined period before the date of your Medicaid application. New York established the Rule to ensure that applicants haven’t gifted, within the look-back period, assets that could have been used to pay for medical or long-term care.

Generally, the look-back period in New York State is 60 months (or five years). This applies to applicants for nursing home or other medical care.

Home-based care has a different standard. For a long time, New York didn’t even apply the Look-Back Rule to applicants for the “Community Medicaid Program,” which covers home care and community-based services. But, that changed effective October 1, 2020, as the State now imposes a 30-month (or 2.5 years) look-back for those applying for home care.

Avoiding the Look-Back Penalty

Indeed, any assets you gift or transfer within the 30 or 60 months before your application to Medicaid will be scrutinized by the State. This does include Life Estate conveyances, as they’re considered gifts with value. 

When a Medicaid applicant is found to have made a valuable transfer or gift within 30 or 60 months of applying, a “penalty” period of Medicaid ineligibility, using a complex formula, will be imposed. Sometimes, applicants are stuck waiting many years before qualifying.

The inescapable conclusion is that long-term care is NOT something that you can start planning when a loved one is already in the nursing home and running out of funds. 

The Life Estate transfer can be a powerful tool for conveying wealth outside the long arms of the State. But, as you can see above, only when it is done early, and with due consideration of the ever-changing Medicaid and Estate Planning Laws of New York.

The key is to plan and act now. Avoiding the topic or waiting until it is too late can be a very expensive dilemma.

The information on this website is not legal advice. It is for information purposes only. No user of this site should act or refrain on the basis of this information without seeking legal counsel. This website does not create an attorney-client relationship. Photo credit: ShutterStock photo ID: 1377241520