"Do you recommend life estates or irrevocable trusts?"

Answer:  Life estates and irrevocable trusts are tools that estate planners use to help their clients achieve defined objectives.  Usually, one tool is more effective than the other in reaching a desired objective.  The usefulness of these tools varies from State to State, and you should employ them only with the help and advice of a licensed attorney in your jurisdiction.

An example of when a life estate might be the best approach is where Mom and Dad have sold their home in order to move closer to their children, and it turns out that Dad needs nursing home care.  Instead of spending all of the sales proceeds on Dad’s nursing home care, perhaps Mom purchases a life estate in a child’s residence for the full fair market value of the life estate.  The life estate will give Mom the right to live in the residence for the rest of her life, but her interest terminates upon her death.  As long as Mom actually lives there for a year after purchasing the life estate, her interest in the residence will not be a countable resource for Medicaid eligibility purposes when Dad goes into the nursing home, and it will not be countable against Mom’s eligibility later on if she also needs nursing home care.  Thus, Mom and Dad can lawfully convert some of their non-exempt cash into an exempt interest in a residence.  The purchase of the life estate may generate capital gains tax for the child, but that burden may be outweighed by the benefit of enabling Mom and Dad to qualify for Medicaid benefits.

An irrevocable trust might be used where Dad is going into a nursing home, and his and Mom’s assets are such that he will qualify for Medicaid benefits at that time.  One of the things Dad can (and probably should) do is transfer his interest in his and Mom’s residence to Mom.  The transfer to Mom will be ignored for Medicaid eligibility purposes.  A reason he might want to do so is that if Mom predeceases him and he ends up being the sole owner of the residence, he may be disqualified from Medicaid, unless he can communicate an intent to return to the residence in the event he is ever able to do so.  In any event, the State Medicaid office will almost certainly place a lien on the residence so that if it is ever sold, the State will be repaid all of the Medicaid benefits paid on Dad’s behalf before his family ever shares in any remaining sales proceeds.  However, Mom could avoid this result by placing the residence into an irrevocable trust which pays her all of the income for the rest of her life, and then the trust terminates and the remaining assets go to the kids.  As long as she creates and funds the trust at least five years before she applies for Medicaid benefits, the residence can pass to the children without jeopardizing her or Dad’s Medicaid eligibility.

It is critical to remember that the Medicaid rules vary from State to State, so before you do anything in this area, you need to seek guidance from an expert in your State who can counsel you regarding the local interpretation and application of the rules.  A great place to find such an expert is at http://www.eldercarematters.com/statechapters.htm.

Scott A. Makuakane, Esq., CFP
Est8Planning Counsel LLLC
Honolulu, Hawaii  96813
808-587-8227
Member of the national ElderCare Matters Alliance, Hawaii chapter

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