For years, lawyers have used a particular planning technique
to protect a client's assets from potential long-term care costs. The idea used by attorneys is to have the
parent change the ownership structure for their real estate. Generally, a person owns their real estate in
what is referred to as fee simple absolute.
This means that parent(s) own the entire parcel of real estate, and no
one else has an ownership interest in the property. In the elder law arena, lawyers would have
the parents retain a life estate interest in the property and deed a remainder
interest to their children, or, if the lawyer was more sophisticated, he or she would
use an irrevocable trust to own the
remainder interest.
If this life estate interest was created, it would begin the
five-year look-back period related to Medical Assistance planning also referred
to as Medicaid planning. Assuming the
parent(s) did not need long-term care services within five years of doing this
transfer, then the property would no longer be considered an available asset
and would not have to used to pay for the parent's long-term care cost. In addition, at death, the parent's life estate interest
would vanish, and the children or the irrevocable trust would own 100% of the
real estate and would be able to move forward with the sale of the real estate
and the division of the proceeds from the sale.
Essentially, the state or federal government would have no means of
making a claim against the parent's estate, because the life estate interest
vanishes as of the parent's date of death.
This planning has been considerably disrupted by recent law
changes made in the State of Wisconsin.
For some time, many states have held that the retention of the life
estate interest is still a countable asset or is an asset that can be covered
against after the parent's date of death.
Wisconsin has now become a state that will impose an Estate Recovery
Claim against the value of the life estate after the parent's date of death. This means that the entire value of the
property will not be protected from a potential Medicaid reimbursement claim in
the event the parent does qualify for Medicaid.
For example, assume a parent creates this life
estate/remainder interest ownership structure for their family farm. During the parent's life time, the parent
enjoys the use and income from the farm.
Eventually, the parent's health fails, and the parent needs to enter a
nursing home. Five years has expired
since the parent transferred the remainder interest to the children or the
irrevocable trust. The parent qualifies
for Medicaid, and Medicaid begins paying for the parent's cost of care at a
local nursing home. The parent ends up living
in the nursing home for fourteen months.
Medicaid pays a total of $70,000.00 toward the cost of the parent's
care. During this time, the parent never
had to pay for the cost of the nursing home.
However, after the parent's death, the State of Wisconsin has an Estate
Recovery Program that will assert a claim against the value of the life estate
interest in the family farm. The value
of the life estate interest is determined by an actuarial table contained in
the Medicaid eligibility handbook that is published by the State of Wisconsin. As the parent gets older, the life estate
value decreases. Unfortunately, the life
estate always has some value as of the parent's death.
The good news is that for all life estates created prior to
August 1, 2014, the old rules will apply.
This means that the State of Wisconsin cannot make a claim against the
life estate value after the parent's death.
On the contrary, if the life estate interest is created after July 31,
2014, the State of Wisconsin will be able to make a recovery claim against the
value of the life estate interest in the real estate. This is a significant drawback to this type of
planning. While the value of the
remainder interest will potentially be protected, assuming the five-year
timeline has expired, the value of the life estate interest will not be fully
protected. The State of Wisconsin will
be able to make a claim against the value after the parent's death. This is important information to understand,
because there are countless properties out there with life estate/remainder
interest ownership structures.
The last few weeks have been interesting in my practice,
because I have been assisting several people with the creation of life estates
to take advantage of this planning that will soon disappear. If you find that lawyers are still using this
life estate/remainder interest planning technique after July 31, 2014, you will
want to make certain that your clients understand that the full value of the
property will not be protected through this type of planning. I am the first to admit that there are
reasons for still doing the planning, but the tremendous benefit of protecting
the entire value of the property after the expiration of the five-year look-back
period is now not one of them.
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