Melissa Negrin-Wiener, Esq.
Elder Law and Estate Planning often involve the transfer or sale of real property as part of an asset protection plan. Missteps can happen in the process if the intricate rules of such transactions are not carefully observed, which can have a disastrous impact on family finances. It is imperative to consult an elder law attorney when transferring or selling property that is held in an irrevocable trust or otherwise part of an asset protection plan.
Transfer to An Irrevocable Trust
Marie and her daughter, Connie, consult an elder law attorney for asset protection purposes in March of 2010. Pursuant to EPTL §7-1.17, Marie creates an Irrevocable Trust of which she is the Grantor and her daughter, Connie, is the Trustee. The Irrevocable Trust is a Grantor Trust created and funded by Marie. The trust identification number is Marie’s social security number and all taxes are reported on Marie’s individual tax return. The same day the trust is created, Marie signs a deed transferring the ownership of her home to Connie as Trustee of her Trust.
Seven (7) years later, Marie decides that her house is too much to handle and chooses to move to assisted living. She contacts a local attorney to handle the sale of her home. The closing takes place a few months later and the check for the proceeds of the sale is written to Marie instead of to Connie, as Trustee. A minor detail? Absolutely not! This simple act completely unravels the asset protection plan Marie implemented in 2010. Five (5) years after the initial transfer, the total value of the real property was completely protected for Medicaid purposes (06 OMM/ADM-5). Marie now holds an unprotected asset and must begin a new five (5) year look-back period if she wishes to protect the sale proceeds.
This is obviously a critical error with dire consequences. Elder law practitioners know that the proceeds from the sale must be made payable to the name of the trust, thereby preserving the asset protection plan; however, the typical attorney handling real estate closings may not.
Transfer Subject to a Life Estate
Another popular asset protection tool utilized by elder law and estate planning attorneys is the transfer of property subject to a life estate. A life estate is a limited interest in real property whereby the owner of the life interest has the right to use the property for life. A life estate is not a countable resource for Medicaid eligibility purposes and Medicaid cannot file a lien against a Medicaid recipient’s life estate (06 OMM/ADM-5). Like the irrevocable trust, the treatment of a life estate as it pertains to the Medicaid planning and application process, is very specific and the implications of handling a life estate improperly can be a financial nightmare to the Medicaid recipient and their family.
Consider the following example: in May 2011, John transfers the deed to his home to his son Charlie subject to a retained life estate. John 1) has the right to live in the home for his lifetime, 2) is entitled to keep all of his tax exemptions (STAR, Veterans, etc.) and 3) remains responsible for the taxes and the upkeep of the home during his lifetime. Charlie has a remainder interest in the property and when John passes away, the home will pass to Charlie by operation of law.
In July of 2016, John goes into a nursing home and is approved for Medicaid. The home, having been transferred more than five (5) years earlier, is protected for Medicaid purposes and has no impact on John’s Medicaid eligibility. A few months after John’s nursing home admission, Charlie decides to rent the home and seeks the assistance of a realtor and attorney to prepare the rental agreement. Unfortunately, Charlie is unaware that John has the right to the rental income based on his retained life estate, and that, pursuant to the Medicaid regulations, the rental income must be paid to the nursing home as part of John’s Net Available Monthly Income (“NAMI”). Upon learning this, Charlie decides it makes more sense to sell the property and works with a local attorney to effectuate the sale. The closing checks are mistakenly written in full to Charlie. A year after the sale of the home, John’s Medicaid benefits must be recertified. Charlie was not informed that John’s life interest in the property had a value based on John’s life expectancy and that John was entitled to receive a portion of the sale proceeds. Had John received the value of his life interest at the time of closing, he would have no longer been eligible for Medicaid benefits. As such, his benefits were incorrectly paid as of the date of the closing and Charlie will have to return funds to John to pay back the Medicaid program.
Had an elder law practitioner been consulted in this matter, Charlie may have chosen to upkeep the home for John’s lifetime or, in the alternative, John would have received the proceeds equal to the value of his life interest at the time of the closing. This would have allowed for additional asset protection planning, thereby preserving some part of John’s life interest.
In another example, Nancy enters a nursing home in May 2016, more than five (5) years after the transfer of her real property to her daughter, Susan, subject to a retained life estate. For Medicaid purposes, the real property is fully protected as the look back period has passed. In April 2017, Susan decides to sell the property for $500,000 without consulting an elder law attorney. At this time, Nancy is seventy-five (75) years old. Pursuant to §7520 of the Internal Revenue Code, the rate used to determine the life estate factor in April 2017 is 2.60%. According to the Internal Revenue Service’s Actuarial Table S, the life estate factor in this case is 0.23751. This factor is multiplied by the sale price of the property and therefore the value of Nancy’s life estate is $118,755. As the life tenant, Nancy is entitled to those funds and, upon the sale of the property, no longer qualifies for Medicaid benefits. Had Susan kept the home until Nancy’s passing, she would have inherited the entire value of the home with a stepped up tax basis and even more importantly, Nancy would not have had to spend down her life interest in the property on her nursing home care. Had an elder law attorney been consulted in this case, these negative consequences could have been avoided.
Asset protection, advance planning and often Medicaid planning should be included in the review of a client’s estate planning needs, particularly when an individual’s home is one of their largest assets. For that reason alone, it is imperative that any practitioner involved in the sale or transfer of a client’s real property review whether the property is part of an asset protection plan. Consulting an elder law attorney is critical before any real estate sales, transfers or rentals are undertaken when there may be a trust or life estate involved.
Melissa Negrin-Wiener, Esq. is a partner at the Elder Law firm of Cona Elder Law PLLC in Melville. Ms. Negrin-Wiener manages the Government Benefits Department, concentrating her practice in the areas of Medicaid eligibility planning, asset protection planning, guardianships and estate planning. Ms. Negrin-Wiener is the immediate past President of the Suffolk County Women’s Bar Association. She can be reached at 631.390.5000 or firstname.lastname@example.org.