Dear Michael:

We have heard the way Medicaid is dealing with life estates is different than what you described in past articles. Can you give us a rundown of what the new rules are regarding using a life estate to protect against Medicaid?

– Life Estate Owner

Dear Life Estate Owner:

In 2005, the Deficit Reduction Act was passed and the law had all kinds of different parts to it – as most laws do these days. The bill itself is close to a hundred pages long.

Recently, I have tried reading the bill – or the law – to determine how life estates are going to be handled from the time of the bill signing in January 2006. The bill was specifically designed to limit how much Medicaid was going to pay for all people on Medicaid and for hundreds of different problems and hundreds of different ways they were going to reduce payments.

Congress truly wanted to balance the budget in 2005 and reduce our Federal deficit and they believed by reducing Medicaid payments, this would accomplish this.

I’m not an attorney, and reading through this law would take weeks. Life estate appears in the law’s language, in that if you should buy a life estate from someone – in other words, their right to use or receive income from an asset, this value would be used against you in the determination of Medicaid eligibility.

If someone had a right to live in a house, for example, until their death and you wanted to buy that house from them, you could purchase their right to live in the house. However, if you need help from Medicaid, based on the person’s estimated life span, there is a value associated with your right to live in the home.

This value is computed by using the Life Estate/Residual Interest table, which is a table the IRS has been using for years. For example, at age seventy-five, your life estate interest is determined to be 50% of the fair market value of the property and the residual interest – the deed owned by the people you gifted it to, would also be worth 50%.

This table runs from age zero to age 109; the age of 75 is the midpoint. After this age, you are deemed to have less and less value as you approach the age of 109.

If you’re wondering what the value of your life estate interest is for your property, simply ‘Google’ life estate/residual tables and look for your age. You would then multiply this value found next to your age to determine how long it would be before you are Medicaid eligible.

For example, “Joe Farmer” gifts a residual deed to his farming son, “Joe Junior”. At the time he enters a nursing home, he is 83 years old. Looking at the table, it shows Joe Sr.’s value in the property is still .36998, or 37% of the FMV of the land. If the land is now valued at two million dollars, Joe Sr. would have to include $740,000 in his countable assets. These countable assets are then divided by the average cost of care in the state to determine how many months he would be ineligible.

Let’s say this average cost of care is $10,000. So $740,000 divided by $10,000 equals 74 months of ineligibility or over 9 years. Joe Sr. is unlikely to ever receive payments from Medicaid.

But – and there’s always a ‘but’ – if Joe Jr. talks to two doctors who provide a statement that Joe Sr. is likely to die prior to age 109, then the estimated years of of age the doctor provided are used instead. This would mean you move up the table to say, age 107, if they estimate Joe Sr. only has two years to live.

Now the value, at 107, is 13.409%. Going through the same process, multiplying this against the FMV, you come up with $260,800 divided by $10,000 equals 26.8 months of ineligibility.

Joe Jr. must then spend at least $260,800 on his father’s care to cover the period of ineligibility or lose the entire $2,000,000 farm. If his father needs critical care, it’s likely his costs of care will be much higher per month, but in shorter time duration.

People are now using LLCs to protect their property from long-term care costs, but this is a subject for another article.