Use of a Life Estate Should be Rare - Part 1

Saving the family home from the high cost of nursing homes and other long term care expenses is high on the set of priorities of most middle-class seniors. Elder law attorneys have educated clients on the various solutions to this problem over the years. Perhaps the most popular legal solution to this problem is the creation of a life estate. It is also the most overused and usually inappropriate tool we have at our disposal. Its use should be rare.

A life estate is created by preparing a new deed. The deed conveys the property, in the usual manner, from the party of the first part to the party of the second part. For example, Mom transfers her property to the names of her children. The only addition to this is that in the body of the deed, perhaps after the description of the property, the following language is inserted (or words to this effect): THE PARTY OF THE FIRST PART HEREBY RETAINS A LIFE ESTATE.

As is evident, the creation of a life estate is simple. It is a concept that all lawyers and clients can understand with ease. My contention, however, is that its simplicity breeds a climate for its inappropriate and over use.

Next week we'll explain the benefits of the life estate.

Use of a Life Estate Should be Rare - Part 2

Life Estate Benefits A transfer of real property by deed with a retained life estate can protect the property from having to be consiered an available asset when seeking Medicaid coverage of long term care expenses. Subject to the look-back and transfer penalty rules, at a certain time in the future, the property will be protected.

A transfer of any non-exempt asset causes a Medicaid penalty, that is an amount of months in which the Medicaid applicant will not be eligible for Medicaid. Currently the formula to determine this, on Long Island, is, subject to a three year look-back (five years if the transfer is to an irrevocable trust) that the applicant will not be elgible for Medicaid for one month for each $8,272 transferred.

One benefit of a life estate is that the value of the retained life estate itself is not considered for such transfer penalty purposes, thereby reducing the penalty period from the longer period based on the full value of the property.

The value of the retained life estate remains an asset of the Medicaid applicant, but it is at best an illiquid asset which Medicaid practically ignores. Medicaid will place a lien on this life estate value, but the lien is extinguished with the life estate itself upon the death of the life tenant.

Lawyers and their clients also love life estates because they keep seniors in control of their homes and allows them to retain all property tax exemptions.

Furthermore, upon the death of the life tenant, the reamindermen children now own the entire property, without probate, and they receive a step-up in tax basis, thereby eliminating all captial gains when the property is sold after their parents' death.

Life estates sound great. Our senior clients are in control, they have protected their homes from long term care, they have avoided probate and have preserved all tax benefits. So what could possibly be wron with the life estate technique in this context? Tune in for the answer in an upcoming newsletter.

Use of a Life Estate Should be Rare - Part 3

SELLING THE HOUSE The problem with a life estate is that it can lead to disastrous consequences when the house is sold during the life of the life tenant.

Assuming that there is no concern with the need to obtain the consent of the remaindermen children to sell the property, there still exists tax and Medicaid problems with a sale of the senior's principal residence.

When a home is sold in a life estate situation, the sales proceeds are split between the life tenant and the remaindermen. The Federal government laid the ground work for the proper percentages to apply in this context when it published Health Care Financing Administration (HCFA) transmittal #64. To give an example of the breakdown, if the life tenant were 76 years old at the time of the sale, 50 percent of the sales proceeds would inure to the benefit of the life tenant and 50 percent to the benefit of the remaindermen. Carrying this example further, what then are the tax and Medicaid ramifications of this sale?

Let's first discuss the tax ramifications, that being whether or to what extent the principal residence capital gain exclusion (IRS 121) can be applied to this transaction. The law permits a homeowner to exclude from capital gains $250,000, provided the homeowner owned and resided in the home for at least two out of the last five years. As applied in this case, a 76-year-old life tenant would have only owned 50 percent of the property and thus would only be allowed to apply her $250,000 capital gains exclusion to the gains realized on such half. (As an aside, the IRS does not use the HCFA tables to determine the proper allocation between the life tenant and the remaindermen).

The remaindermen children, on the other hand, would not be allowed to apply any exclusion to the gain on their half, assuming they do not live with their parent(s). Therefore, a sale of a home in a life estate situation would cause capital gains to be paid on the remaindermen children's portion.

More sophisticated solutions involving irrevocable trusts solve this problem and should be offered to the clients as an alternative plan. The house can be transferred to an irrevocable grantor trust (pursuant to IRS code 674 and/or 675) and when sold during the senior's life, the full $250,000 captial gain exclusion could be applied to the entire property.

Next we'll discuss the Medicaid ramifications that must be considered with a life estate.

Next week we'll explain the benefits of the life estate.

Use of a Life Estate Should be Rare - Part 4

The Medicaid ramifications must also be considered when using a Life Estate. If the life tenant is not on Medicaid, then in the case we have been discussing in previous newsfaxes, 50 percent of the sales proceeds will be returned to the life tenant in an unprotected manner, necessitating a transfer (subject to look backs and penalties) all over again. Now that the client is older and perhaps less healthy, we are jeopardizing the assets, albeit half, all over again.

If the life tenant is on Medicaid, then Medicaid will have placed a lien on the life tenant's portion of the property which then must be satisfied at the closing. Here, we would simply lose 50% of the property.

In either case, if the property had been transferred originally to an irrevocable grantor trust, then the sales proceeds wold have been payable to the trust, not returned to the senior. The trustee can then, if appropriate, purchase another home or otherwise invest the sales proceeds, without any further concern for the Medicaid system.

The bottom line is that a life estate poses tax and Medicaid problems during a sale of the property during the life of the life tenant. An irrevocable grantor trust will also keep the senior in control, protect their homes from long term care, avoid probate and preserve all tax benefits, but allows the senior (or her trustee) to sell the house at any time during their life without tax and Medicaid issues. The use of a life estate ties the hands of a senior because of the practical inability to sell the house during life.

When a lawyer approaches a client about this issue, the first question that should be asked is whether they are prepared to give up the right to sell their house during life. In those rare cases where the client is willing to give up all desires adn rights to sell the house during life, the life estat is the appropriate tool to use.

Frequently Asked Questions

What is Elder Law? Elder Law is an area of the law that deals primarily with planning for incapacity. Many documents used in Estate Planning overlap with Elder Law planning such as Powers of Attorney, Health Care Proxies and Living wills.

Do I need a power of attorney and a health care proxy? A durable power of attorney is a document that allows you to appoint one or more persons to make your business and financial decisions. Powers of Attorney drafted by experience Elder Law attorneys generally provide enhanced gift giving provisions to allow your agent to use the Power of Attorney for Medicaid planning to protect your assets if you are unable to do so. A Health Care proxy is a document that allows you to appoint someone to make your health care decisions if you are unable to convey your wishes. The form should cover artificial nutrition and hydration. It is important that you discuss your healthcare wishes. If you have a properly drafted durable Power of Attorney and Health Care Proxy in place, there is generally no need for an expensive guardianship proceeding if you become incapacitated.

What is a Living Will? While a Health Care Proxy is the appropriate document used to make health care decisions in New York, for persons who travel or snowbird, the Living Will is an alternative document used in other states. Essentially, the Living Will provides more detailed information about what procedures you want or do not want if you have a terminal condition where you are expected to pass away shortly. The language in the Living Will can also be used as clear and convincing evidence of your wishes in a new York court in the event your Health Care Proxy agent's decisions are challenged.

Definition of "Homebound" Clarified

Many are covered by Medicare for home health services. To receive such services, each beneficiary must: 1. Require skilled nursing care on a periodic basis, physical or speech therapy or need to maintain occupational services after skilled nursing or therapy has stopped; 2. Be under the care plan of a physician; 3. Receive services from a Medicare certified home health agency; and 4. Be confined to the home("homebound"). 42 U.S.C. Sections 1395f(a) and 1395n(a).

Section 507 of the Medicare, Medicaid and SHIP Benefits Improvement Act of 2000 (BIPA) has recently clarified that certain absences from the home by a beneficiary receiving Medicare home health care benefits are permissible. Moreover, beneficiaries may continue to receive such services when they need to leave the home, specifically for absences associated with the need for "therapeutic, psychosocial, or medical treatment in an adult daycare program that is lecensed and certified by a State, or accredited, to furnish adult day-care services in the State.

BIPA has also allowed for the attendance of religious services without disqualifying the person from Medicare home health care. In fact, BIPA has provided that an absence from home resulting from the attendance of a religious service "shall be deemed to be an absence of infrequent or short duration" thereby classifying the person as homebound to receive continued Medicare home health benefits.

[HCFA has provided "Q & As" to offer guidance to beneficiaries and professionals associated with Medicare home health services. The "Q & As" address the definition of "homebound" and clarify definitions of therpeutic services, psychosocial services, the specifics regarding state licensing and certification.] The Q & A's are available on the websites of HCFA and Medicare at www.hcfa.gov and www.medicare.gov.
Source: The National Senior Citizens Law Center in the Washington Weekly - May 2, 2001. Volume XXVII No. 21.

Durable Powers of Attorney - Part 1

Let's start with the basics. A durable power of attorney is a document in which you can delegate certain powers over your financial life to another person or persons. While it takes effect immediately upon signing, it is most useful at a time when, for a variety of reasons, you can no longer act on your own behalf. In fact, what makes the power of attorney "durable" is the very fact that your agency can act for you when you, the principal, suffer from some disability. For the power of attorney to actually be "durable", the document must simply state that the agent can act regardless of any subsequent disability of the principal, or words to that effect. Since there is a high probability that an older client may face such a period of disability, a durable power of attorney is one of the essential tools that must be implemented in any estate plan for an older adult.

Most of us may know this already, but what we do not know is the extent of ELDER ABUSE associated with durable powers of attorneys. We do know who the abusers tend to be though: known abusers are family members, professionals, caregivers and scam artists, who use the durable power of attorney for their own benefit and of the benefit of their principal.

Persons who are older and sicker are among the most vulnerable people in our society, especially those who become dependent upon their caregivers. As such, they have a dual problem; they are both a likely target for abuse and may be unable or reluctant to report such abuse. In fact, victims of such abuse may be threatened by their abusers with physical or emotional harm, or withdrawal of care, or may simply be unable to comprehend that they are being abused in the first place.

This problem of elder abuse through the misuse of a power of attorney is expected to grow as the population of frail elderly grows. This is especially true because we also expect the use of durable powers of attorney to grow. Why not, the durable power of attorney is the most simple and cost efficient method of handling a person's finances. Moreover, they are very easy to obtain. Just click on to the internet or walk in any stationary store and you can have one in minutes. But perhaps they are too readily available.

Clearly, those who do not use legal counsel will be unaware of the document's scope, limitations and potential for abuse. We'll go into detail in a future newsletter.