In Virginia, elder law attorneys routinely use a "life estate deed" to help a family protect their home from the costs of long term care. A deed is prepared whereby the elders deed the property, usually to their children, but they retain and reserve a life estate in the property. In essence, what is transferred to the children is the "future interest" in the property: the children own nothing until both parents die.
In reality, the life estate interest has a value; it is based on the value of the property and the age of the parents. However, for the purposes on determining eligibility for long term care Medicaid coverage, the Medicaid Manual instructs the eligibility worker to consider a life estate in property has having no value. Thus, the asset protection technique relies solely on a rule, a rule that could be changed at any time! In fact, this rule has been changed twice in the past.
But now, another threat is popping up in states around the country that has elder law attorneys questioning the adequacy of life estate deeds in asset protection planning: estate recovery.
In May an Ohio appeals court ruled that Medicaid could indeed place a lien on the "life estate interest" of a deceased Medicaid recipient's property. The Court specifically ruled that for Medicaid purposes, the life estate survives the death of the Medicaid recipient and the state could thus, place a lien against that interest!
For the last few years, I have been urging my clients who owned property that absolutely required protection from Medicaid to utilize a Medicaid Asset Protection Trust (MAPT). Not only does it protect the asset from the costs of long term care, it also guard against estate recovery. With the ruling in Ohio and other states as to estate recovery and life estates, I will be advising MAPTs even more.
If you own income producing property such a rental properties or farmland, you are a perfect candidate for a MAPT to protect your real estate.