Cohen & Oalican Answer: Can a Life Estate Still Protect Your House from Medicaid Part 1

Part 1

Can a Life Estate Still Protect Your House from Medicaid?


We are often asked by clients and attorneys alike, whether Life Estates still “work”. In other words, can you protect your house from a Medicaid lien with a Life Estate deed. To cut to the chase, Life Estate deeds still work, but they may not be the best option. First, let’s clarify the question. If an individual applies for Medicaid (MassHealth in Massachusetts), their home is considered to be a noncountable asset. Although the regulations make it sound as if your home is a “protected” asset, that is far from true. As a noncountable asset, Medicaid cannot force you to sell your home to obtain eligibility (as long as the equity is less than $750,000). However, at the death of the Medicaid recipient, if the house is in that person’s sole name, the State will have a claim against the house for reimbursement for benefits provided during that person’s lifetime.

Frequently, our asset protection plans focus on a client’s home. Medicaid is only authorized to make a claim against an interest in a house that is in the sole name of the Medicaid recipient. These assets are referred to in legal jargon as “probate assets”. For example, a house that’s held as joint tenants passes to the survivor automatically by virtue of the deed and thus avoids probate and a Medicaid lien.

For many years a simple way to protect the house from Medicaid was by using a Life Estate deed. With a Life Estate deed a client is typically giving away their house to their children but they are retaining certain rights of ownership over the property. Most commonly, clients keep the right to live in the house and the rights to rental income. They also still have an obligation to pay the house expenses. However, the house cannot be sold or mortgaged without everyone’s consent. The parents retained interest in the house is called a Life Estate. The childrens’ rights to receive the property at death is called a remainder interest. Because a Life Estate deed passes automatically at death outside of probate, a Life Estate deed avoids Medicaid’s claim at death.

Prior to February, 2006 (when the federal Medicaid laws changed), Life Estates were quite common. At that time Medicaid imposed a three year “look-back” period for transfers to individuals and a five year “look-back for transfers to trusts. Consequently, clients and attorneys often preferred to use a Life Estate as part of their asset protection plan instead of an irrevocable trust because the house would be protected in only three years. That is no longer the case. Under current law, all transfers have a five year look-back period and in effect make the applicant and their spouse ineligible for five years.

Part 2 to follow

The experienced attorneys at Cohen & Oalican, LLP, can help you prepare for, and resolve, all of your medicaid planning and administration needs.