One primary way the elderly are able to afford nursing home care is through the use of Medicaid benefits. Medicaid is a program that helps low income individuals access medical care, including community and nursing care. The program examines all assets held by the individual to determine eligibility.

An aspect of federal law means that the state has to attempt to recover the benefits it paid out by pursuing the Medicaid recipient’s estate after that person’s death. For individuals over 55, the state can try to recover long-term care benefits that were paid, but also all medical care Medicaid paid for.

We generally assume we can pass our homestead on during our lifetimes, or after death through probate with no risk. Indeed, a surviving spouse can live in the house until the death of their partner, but after the death the state can file a claim against the spouse’s estate. (Another exception is that the estate cannot be recovered from a child under age 21 or who is blind or disabled.) Otherwise, the state can come after the house and sell it to settle the claim.

What is a probate estate and how is it affected by expanded estate recovery?

A probate estate is comprised of property that is held in the beneficiary’s name. Generally, the state will attempt to recover funds from this estate. The estate is property that is held in the beneficiary’s name only. However, they can also seek to recover against property that were jointly held, assets in a living trust, or life estates. This is property that passes outside of probate. However, not all states have expanded recovery of the only likely property in such an estate, the deceased’s house. Therefore, it is wise to check with a lawyer to see if your state only recovers against probate assets, and how your home can be protected. Potential options include tenancies by the entirety, putting the house in the surviving spouse’s name, irrevocable trusts, and life estates. This article is primarily concerned with life estates, but will touch on the difference between life estates and irrevocable trusts.


There are a couple of other specific ways children can be protected and retain the Medicaid recipient’s home or profit from its sale.

Carers who have no residence beside the home in which they cared for the Medicaid recipients can be protected in certain circumstances. An attorney can help you to understand whether the waiver applies.

PLAN AHEAD: 2 years is an important number to understand when considering transferring assets, speak to your attorney and consider Long Term Care Insurance.


A life estate is an element of estate planning. There are three essential elements. It is:

  • Joint ownership, memorialized in a life estate deed
  • Allows one person to reside in a house until death
  • Then passes to the other owner

This keeps the house out of probate. As noted earlier, keeping a house of probate can sometimes protect your property from being taken by Medicaid to repay medical and long-term benefit costs., but only for those states that have not expanded the definition of estate recovery to include non-probate assets. The life estate creates two entities in the arrangement. The life tenant is the person who possesses the property during their lifetime. The second entity is the remainderman. The remainderman has a current “ownership interest,” but will not possess the house until the death of the life estate holder.

The rights of the life tenant during their lifetime

  • Can make repairs
  • Can have tenants
  • Cannot sell or mortgage the property without the assent of the remainderman
  • In a sale, proceeds divided according to the age of the life tenant

Responsibilities of the life tenant during their lifetime

  • Maintain the property
  • Pay real estate taxes
  • Pay insurance
  • Pay any capital gains tax exclusion for a personal residence

Joint responsibilities of life tenant and remainderman

  • If property is sold or mortgaged, which, again, can only happen upon the agreement between the life tenant and beneficiary, the beneficiary will receive part of the proceeds, depending on a scale that involves both the life tenant’s age and current interest rates.

If the life tenant allows “waste” to occur and does not uphold their responsibilities, the heirs can terminate the life estate. In a state that expanded its definition to include non-probate assets as recoverable, what happens? The lien that state places on the property will apply to the value of the life estate, not the full value of the property. How do you determine the value of the life estate?


If you apply for Medicaid within five years of transferring your property and retaining a life estate, you may find that you are ineligible for Medicaid assistance with nursing home care.

What is a Medicaid ineligibility period and what is the purpose? The ineligibility period is intended to prevent people from giving away all of their assets for no value solely to qualify for Medicaid. The penalty period is calculated by dividing the amount you transferred by what Medicaid finds is the average private pay cost of a nursing home in your state.

The specific application of these rules is somewhat state-specific. The overriding rule, however, is that a Medicaid applicant is subject to a “look back period”, which is 60 months everywhere except California where it is 30 months. The agency examines all financial transfers during this time to ensure no assets were transferred for less than fair market value.

Exceptions include transfers of assets including a home to a spouse or for a spouse’s benefit, a transfer to a trust for the benefit of a blind or disabled child, and in some cases a trust for the benefit of a disabled individual under 65. Special other rules apply that may exempt the transfer of a house. These rules are specific, so it’s best to discuss them with a lawyer to avoid putting yourself in financial hardship.

If you have made a transfer that triggered the Medicaid ineligibility period, you may talk to your lawyer about curing the penalty by having the transferred asset returned in part or in its entirety.

Also, in rare circumstances, Medicaid may apply the “undue hardship” rule. This is a difficult case to prove, with somewhat inconsistent application.

If you were to move into a nursing home and not being able to sell your house would leave you without medical care, food, or the necessities of life, in some cases you might be eligible for the undue hardship exception. Basically, you need to prove that you could not afford nursing care without the sale and that without the sale your life or health is in danger.


Life estates and irrevocable trusts are both used estate planning. Each can be used to help an individual qualify for Medicaid by transferring large assets into a situation where Medicaid won’t count the asset.

A life estate, as discussed at length herein, splits ownership.

Although the tenant retains some interest in the property, Medicaid does not count it as an asset.

An irrevocable trust puts control of the assets in the hands of the beneficiary, and loses all control of the assets. However, the assets in the trust are protected from taxes and creditors. If a husband and wife both own a home, one spouse can transfer his portion to the other. The founder of the trust relinquishes most rights to the home, except that the beneficiary cannot sell the home unless named trustee. In this situation, too, Medicaid will not include the home as an asset. As with the life estate, you must leave a five year gap between the creation of the trust and the application for Medicaid.

One can combine elements of life estates and irrevocable trusts. It is possible put a residence in an irrevocable trust, which changes ownership, but retain a life estate that allows you sell, remodel, or rent out part of the house. You may consider alternative ways to pay for long term care, like selling your life insurance policy.

Summary of the Pros and Cons of a Life estate

  • Avoids probate: life tenant’s rights to the property end with their death. A home tied up in probate requires the heirs to continue paying property taxes and mortgage while that process goes on.
  • Property is not subject to estate taxes, obviously, because it is not part of the estate.
  • Life tenant may receive tax incentives like reduced homestead or senior tax exemptions.
  • Remainderman may have reduced capital gains after the death of the life tenant. The house will be valued, not at the date the house was purchased, but at the purchaser’s death, generally leading to less capital gains taxes.


  • Could be subject to the gift tax at the time of the creation. The remainderman may need to claim the property as a gift if the interest is greater than the federal gift exception. Gift taxes, however, might be lower than the estate taxes to which it would otherwise be subject.
  • The life tenant has exclusive possession of the property during their lifetime. Therefore, it is possible to evict a remainderman who is living with the life tenant.
  • Remainderman could face capital gains taxes if the property sold while the life tenant still alive. But remember, for such a sale to occur, both parties must agree.
  • The remainderman may be faced with a lien on the property due to the life estate holder’s actions. A lien can be caused by a lawsuit or due to back taxes, collectible IF the property is sold.
  • Remainder interest does pass to the remainderman’s heirs in the case of the remainderman’s death. The life tenant may end up dealing with unexpected people.

Both a pro and a con is that once a life estate is created and a remainderman chosen, the arrangement is permanent unless you get the agreement of the remainderman. That is, it is a stable structure where the parties cannot go to court to unwind the life estate.

One final drawback: the effect of the life estate on financing

How can a life estate negatively affect financing? A home equity loan is typically an open line of credit for borrowers to use. Often the financing is used to fix up the property, or to consolidate debt. Like with a mortgage, the home equity loan uses the home as security. That is, the lender can foreclose on the house to recover outstanding debt in the case of certain default. Obviously if the life tenant could take out such a loan, it could negatively affect the remainderman’s rights to the house. Consequently, to get a home equity loan, you will need permission from the remainderman, who becomes obligated on the loan as well.


Contact an attorney to determine the best way to protect your assets for you, your partner, and your other survivors. There are many options to choose from, and it is important to understand how state law affects your decision.

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You may consider alternative ways to pay for long term care, like selling your life insurance policy.


Life Estates and Other Protections for Your Home While Receiving Medicaid




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