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Retained Life Estates, Medicaid Planning, and Trusts

Last month's article dealt with 10 questions to ask yourself regarding estate planning and your home, most of which dealt with the realities of property management and use during your lifetime. This month, I want to turn the focus specifically to retained life estates and how they might impact other estate planning concerns.

People often think of two distinct planning options with a home, which are either placing the home in a trust or transferring the home to individuals with a retained life estate. With a trust, there is a need to determine what that will look like, for example, revocable versus irrevocable. An irrevocable trust is most typically used in what you hear of as "Medicaid planning." A transfer with a retained life estate can sound similar, but these are different facets of estate planning.

What is a retained life estate?

Very simply, with a retained life estate, you transfer ownership of your property during your lifetime, but, among other rights, part of the terms of the transfer are that you retain the right to live in the property for at least a set number of years, if not the remainder of your life.

General Concerns with a Retained Life Estate

There are some general issues that must be addressed when considering this type of arrangement:

  • You can decide to retain certain rights and powers, in using a trust or transfer with retained life estate, to keep your real estate tax exemptions. What real estate tax exemptions do you currently have?

  • What happens if the taxes, maintenance, homeowner’s insurance and utilities are too difficult for you to keep paying?

  • What happens if the property needs to be sold during your life? While you might have a lifetime right to live in the property, you no longer have the right to sell the property yourself.

  • If the home is sold during your life, capital gain taxes will be considered differently depending on the type of transfer. This can be an unanticipated issue for the retained life estate option.

Retained Life Estates and Medicaid Planning

A transfer to a revocable trust is not a transfer for purposes of Medicaid planning, that is, it’s still considered your asset, but such a trust has other benefits. If choosing an irrevocable trust or a retained life estate, you still need to pay careful attention to the "lookback" period:

  • Transfers during the "lookback" period, either with an irrevocable trust or with a "retained life estate" will, for the purposes of Medicaid, cause a penalty.

  • If Medicaid is needed while still in the "lookback" period, the penalty will be calculated differently depending on whether an irrevocable trust or transfer with "retained life estate" was used. If this is a potential concern, what other plans are in place?

  • Even after a potential lookback period has passed, if the home is sold during your life while receiving Medicaid, this can be an unanticipated issue for the retained life estate option.

Retained Life Estates and Other People

When using a trust, and particularly when using a retained life estate, it's always important to think about and envision how the people you are transferring the property to will handle and manage the property; a trust can be handled by one person who must follow the rules and instructions laid out in the trust.

  • What happens if a minor is one of the individuals that may end up being a beneficiary of your home? (This is a problem!)

  • What happens if you transfer the property to an individual who has any number of issues, such as judgments/creditors, eventually goes through a divorce, cannot manage the property, passes away, etc.?

The desire to stay in your home can be powerful. There's so much security in the idea that you can remain in a place that you've loved and that holds memories, and may see it as the best way to ensure that your loved ones inherit the home.

If you would like to discuss if a retained life estate should be part of your plans, please reach out.

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