This article will discuss the differences between a Medicaid Trust and a life estate deed to protect real property from long-term care costs.
A Medicaid Trust allows individuals to transfer their home (or other assets) into an irrevocable trust. The grantor of the trust may appoint a Trustee, a person who manages the trust assets. Once assets are transferred to the trust, the grantor gives up the right to remove the trust’s principal  but retains the right to receive trust income. Generally, the most common asset transferred into this type of trust is real property—specifically, the home; this is because a person’s residence is usually not an income-producing asset. This is also a very useful technique to protect a family cottage.
Gifts made to a Medicaid Trust are subject to a 60 month look back rule. Therefore, transferring a residence (and other assets) into a Medicaid Trust begins the clock running on a five-year look back period. Once that period lapses, the value of the property and any other assets transferred to the trust would be removed from consideration by Medicaid even if the individual(s) were not able to continue living in the home. This ensures that assets are preserved for the family upon the individual’s death, rather than having to spend down these assets should the individual need nursing home care in the future.
If the grantor decides to sell the home during their life, the sale proceeds may be used to purchase a new home, condominium or cottage for the grantor’s use. When the Trust purchases the new home, the five-year clock does not begin again, instead the date of the initial gift remains the same.
As grantor of the Medicaid Trust, you retain the right to alter the beneficiaries; this is done by retaining a limited power of appointment within your Last Will and Testament. Furthermore, you also retain the right to remove a Trustee for any reason. Upon the death of the surviving spouse, the home will receive a step-up in basis for capital gains purposes. Additionally, the Trust allows you to determine how you want the proceeds of the Trust assets to be distributed. Finally, the trust allows the home (and any other asset owned by the trust) to avoid probate which saves unnecessary time and expense. The Trust also avoids any Medicaid estate recovery liens. A life estate is a form of real property ownership that allows one party, the life tenant(s), to retain a life use in a home until his or her death. Upon the life tenant’s death, the home transfers to the second party, also known as the remainderman/men. The remainderman’s interest in the property is not vested until the death of the life tenant. The life tenant has control of the property during his or her lifetime and has the responsibility to pay taxes, the mortgage, utilities and maintain the property.
Upon the life tenant's death, legal title to the home will automatically transfer to the remainderman/men, thus avoiding probate. The life tenant cannot sell or transfer the property without the consent of all life tenant(s) and all remaindermen. If the property is sold while the life tenant is still alive, an actuarial value is given to both the life tenant and the remainderman’s interest in the property. Unfortunately, if the life tenant is in a nursing home at the time of the sale, the value of the sale proceeds would be seen as a resource and spent down towards his or her cost of care.
Below is a chart explaining the difference between a Medicaid Trust and Life Estate in a Residence:
In conclusion, it is important to plan ahead for your long-term care needs and costs. If you have any questions about this Legal Briefing, please contact any attorney of our Firm at 585-730-4773.
 It is important to note that although the Grantor cannot remove the principal, we build in certain trust provisions which allow the Trustee to have the ability to remove the principal and/or “collapse” the trust, if necessary.
This Legal Briefing is intended for general informational and educational purposes only and should not be considered legal advice or counsel. The substance of this Legal Briefing is not intended to cover all legal issues or developments regarding the matter. Please consult with an attorney to ascertain how these new developments may relate to you or your business.
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