John started farming early – he was just 16. He bought his first 80 acre farm at 21 and married Jane at 22. Together, they survived the 80s farm crisis and built a family farm that includes 240 acres.
When John died just before his 80th birthday, Jane automatically inherited the 160 acres that they bought together, but John’s Will gave that first 80 to their three children while allowing Jane to receive the income from the land for the rest of her life. By creating this life estate, John hoped that it would not be counted if Jane ever needed long-term care.
What is a Life Estate?
A life estate exists when someone possesses all of the rights and powers associated with owning property, but only for as long as they are living. The life estate terminates automatically when that person dies and those rights pass to someone else.
To teach the concept, a law professor might refer to property ownership as a bundle of sticks. Each stick in the bundle represents a right or power relating to the piece of property: the right to use, the right to benefit, the power to sell or transfer, and the power to exclude others, for example.
If you took each of those sticks and broke them in half, the left half of the sticks would represent the present-day aspect of the rights and powers and the right half would represent the future aspect of the rights and powers.
For example, you might own the right to occupy a house today or you might own the right to occupy that house in the future after some event has occurred. Or you might own both.
The present-day aspect of each stick is included in the life estate and the future aspects are owned by someone else.
Why Does that Matter for Long-Term Care?
Because a life estate ends upon death, attorneys used to create them in order to make the asset non-countable. The theory was that, if the life estate would end at Jane’s death, no reasonable person would purchase it from Jane once Jane got into her 80s. And, generally speaking, that approach worked for awhile.
But the Deficit Reduction Act of 2005 (DRA) changed the Medicaid rules for life estates. Now, a life estate in property is presumed to have a value equal to a percentage of the total value of the property.
Think about our stick analogy: the present-day aspect might not be half the stick anymore, but it still is part of the stick. Therefore, that part of the stick has at least a little value.
The trouble is, once you’ve broken the sticks apart, the Medicaid rules make it tricky to put them back together: it’s a countable asset, but if no one will buy it, how do you spend it down? That means it could be challenging for Jane’s children to deal with the life estate John left for her.
What to Do if You Have a Life Estate
First, don’t panic. While the solutions are limited, there are several ways to deal with a problematic life estate. And, if your health is good, you may never need to worry about Medicaid at all.
Second, if there is a probable long-term care stay in your future, make sure you talk to an elder law attorney. A lawyer who specializes in Medicaid issues will be able to help you find the right strategy for your life estate.
At Huizenga Law, we’ve built our practice on knowing the Medicaid regulations backwards and forwards and providing effective solutions to help families take care of each other. If you’re facing a problem with a life estate, give us a call at (712) 737-3885 to get started finding a solution!