LONG TERM CARE AND THE HOME
One of the assets most dear to a person’s heart is their home. This is particularly true for older individuals, many of whom have lived in the same home for forty or more years. More than anything else, these individuals want to ensure that their home stays in the family and is passed on to their children. It is the cornerstone of their legacy.
Problems occur when long term care is needed. Since long term care can cost in excess of $6,000 a month and since many older individuals have limited cash reserves – with the bulk of their estate being the value of the house – they find themselves faced with the prospect of selling their house to pay for the long term care they need.
Medicaid is a government program that will pay for many of the costs associated with long term care. Federal laws governing the Medicaid program state that a principal residence is an exempt asset that will not disqualify a person from receiving the benefits of Medicaid, as long as the individual intends to return home. New Jersey law, on the other hand, indicates that the home is an exempt asset only for the first six months that a person is in a nursing home. After the first six months, New Jersey law presumes that the person does not intend to return home and, therefore, the home losses its exempt status.
What this often means is, people who fail to plan for long term care must sell their home to pay for that care. For those who do plan, there are several options that exist to preserve the home. Today, I discuss one of those options: the life estate.
This option involves the transfer of a remainder interest in the home to a family member, say a child, with the elderly parent retaining what is called a “life estate.” The life estate gives the parent the right to live in the house for the remainder of his life. For instance, if the child to whom the remainder interest were transferred wants the parent to leave the house, so he or she could live there, the parent does not have to leave.
The parent also retains other benefits of ownership. If the parent were receiving a senior citizens deduction against real estate tax, he would continue to receive that benefit. The parent continues to receive the homestead rebate, as well.
If the parent has to enter a nursing home, the residence remains an exempt asset for all time and does not have to be sold in order to pay for that care. When the parent does eventually pass away – notwithstanding the fact that Medicaid may have paid tens of thousands of dollars for the parent’s care – the home will pass automatically to the child holding the remainder interest and will escape the Medicaid lien.
Medicaid typically places a lien on any property that the Medicaid recipient owns after the death of the recipient. The lien is a method through which the Medicaid program attempts to recoup monies expended for the care of a Medicaid recipient. For instance, if a Medicaid recipient received $50,000 in benefits from the Medicaid program during his life, Medicaid could attach a lien on property worth up to $50,000 that the recipient owned at time of death. However, because the life estate owned by the parent expired with the parent’s life, there was no property to which the lien could attach.
A life estate can be a useful tool for some people, but it’s not one‑size‑fits‑all. Understanding how it affects control, taxes, and your family’s future makes it easier to decide whether it fits your plans.