Residence Transfer Subject to Life Estate: Medicaid Planning for Occidental Petroleum Employees and Retirees

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Life estate planning helps Occidental Petroleum employees protect their homes while balancing Medicaid eligibility. This preserves homeownership rights and avoids having the home considered in Medicaid asset calculations - 'This helps beneficiaries greatly upon transfer.'

A life estate plan is a safe path for Occidental Petroleum retirees concerned about asset preservation for Medicaid eligibility. By creating a life estate, people preserve their living rights and reduce estate recovery risks so their primary residence can be a legacy for their heirs.

In this article, we will discuss:

1. Strategies for Keeping Home Ownership and Getting Medicaid:  How transferring the remainder interest while keeping a life estate can keep home ownership and help with Medicaid eligibility.

2. Risks & Legal Considerations:  The implications of life estate arrangements, including the risk of losing control of the asset and Medicaid estate recovery in some states.

3. Managing Financial & Tax Implications:  Understanding 'the financial benefits of avoiding probate and minimizing gift taxes as well as the income and estate tax implications of life estates.'

A common dilemma our Occidental Petroleum clients face is how to keep their homes while obtaining Medicare eligibility. Transfer subject to a life estate may save your home and help you qualify for Medicaid. In this planning tool, you pass the 'remainder interest' in your house to your children or other beneficiaries and keep a 'life estate' for yourself. Practically speaking, you deed the house to the remainder beneficiaries and put language in the deed retaining your life estate. Your life estate allows you to live in the house for life. As the 'life tenant,' you still pay all ordinary and necessary maintenance costs for the property, including property taxes, insurance, utilities, and routine repairs. You die and the home goes to the remaining beneficiaries in full.

With this arrangement, you remove some or all of your home's value from your financial picture for Medicaid eligibility purposes and shorten the period of ineligibility while maintaining your right to live in the house. Such a tool for retirement has worked for many of our Occidental Petroleum clients.

How It Works?

Remainder Interest: Not Countable as an Available Asset for Medicaid Eligibility.

Your income and other assets must be below certain limits - which vary state by state - to be eligible for Medicaid. A state may consider only the income and resources legally available to pay for your medical costs when determining eligibility for Medicaid.

A transfer subject to life estate may help you qualify for Medicaid by making your remainder interest in your house unavailable to you (and thus to the state) after a period of ineligibility expires. Yet even the life estate itself counts as an available asset. Medicaid calculates your life Estate using a 'Life estate and Remainder Table' based on your life expectancy and your home value. And because you own the home, any period of ineligibility will be shorter than if you had transferred the home entirely.

Caution:  If either you or your spouse move into a nursing home, the life estate will still allow you to live in the house for life. But if you can't return home, the house could - and perhaps must - be rented - and the net rental income would go toward your nursing home bills.

Preserve Home for Your Beneficiaries.

Of course, a life estate could also help you qualify for Medicaid and keep the house for your heirs. You die and the home goes to the remaining beneficiaries in full. The house is not included in your probate estate and states generally will not pursue the home under a theory of estate recovery. Most of our Occidental Petroleum clients find that desirable.

Caution:  Some states define an estate as including non-probate assets you own at death. Those states lien your house after you die to collect the value of your life estate as of the date of your death.

Reduces Any Period of Ineligibility.

The residence transfer subject is a powerful tool for Occidental Petroleum employees and retirees but there is a period of ineligibility. A gift of the remainder interest in your home, like any transfer of assets for less than fair market value, can result in a waiting period or period of ineligibility for Medicaid eligibility. If you apply for Medicaid, the state may review or look back at your finances - and those of your spouse - for up to 12 months before the date you applied for help. For transfers made after February 8, 2006, the look-back is 60 months. Thus, if you give away a house or a remainder interest in a house within 60 months of applying for Medicaid, you may be ineligible for Medicaid for months under a formula the state sets forth. Suppose this formula is this: the remaining interest (from the actuarial tables) x the average monthly cost of nursing homes in your locale x the number of months for which you will be disqualified from applying for Medicaid. Since only the remainder interest is used for the calculation, any period of ineligibility will be shorter than if you had transferred the home entirely.

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Strengths

Saves Your Right to Live In the Property for Life.

To protect their legal right to live in their home is important to many Occidental Petroleum employees and retirees. You lose the right to live in the home if you give your house to your children in full without putting up a life estate reserve. So if your children divorce or owe creditors money, the house can be sold and you'll have no place to live. By reserving a life estate you keep your right to live in the house. Even if your child sells his or her remainder interest in the property, the buyer would have to wait until your death to take possession of the property.

Avoids Probate

You die and the property passes to the remainder beneficiaries without the expense and delay of probate.

Conserves Assets for Your Loved Ones (In Some States)

After your death, some states want to recover some Medicaid benefits that your estate paid out on your behalf. Your probate estate is sometimes all you call 'estate' in some states only. Since assets given away under a life estate arrangement would be removed from your probate estate, these states could not seek title to the assets covered by this arrangement. Thus the assets would be kept for your family. That ends a huge fear many Occidental Petroleum employees and retirees have - that the state will take assets that they want to pass down.

You Qualify for Medicaid.

This transfers subject to a life estate qualifies you for Medicaid because the rest of your interest in your house becomes unavailable to you (and to the state) for Medicaid purposes once the ineligibility period ends. Also, any period of ineligibility is shortened because your retained interest is not included in the calculation.

Reduces Gift Tax on the Transfer.

If you deed your home with a life estate, you have made a complete gift of the remainder interest. The gift is equal to the fair market value of the home at the time of the gift minus the value of your life estate. But you might not actually pay federal gift tax if it is offset by your applicable exclusion amount.

Gives Your Children a Jump Start.

An additional factor many Occidental Petroleum employees and retirees consider is the tax benefit that transferring a residence to a life estate can provide for their beneficiaries later on in life. It is treated as though your children - or whoever you name as the remainder beneficiaries - inherited your property - for income tax purposes. Essentially, this means that your children can use the fair market value of the property on your date of death to determine their capital gain on a later sale of the property. This is referred to as a stepped-up basis.

Example(s):  Assume John paid USD 70,000 for his home 25 years ago. He gave the property as a life estate and the remainder to his daughter Mary. It is worth USD 250,000 when John dies. If Mary sells the property for USD 250,000 there is no capital gain because Mary gets the 'stepped-up' basis of USD 250,000. However, had John just handed the house to Mary without a life estate reservation, Mary's basis would have been USD 70,000. She would realize a USD 180,000 capital gain.

Tradeoffs

Control of Asset is lost.

Your remainder interest gift is irrevocable. So technically speaking, once you've transferred the property - legally - you have no more say in how it ends up being sold.

Life Estate Value May Be Subject to Medicaid Estate Recovery in Some States.

Your estate could reimburse your state when you die. Most states have traditionally interpreted 'estate' for Medicaid purposes as your probate estate; That means most states have interpreted it as limiting your inheritance to those assets that pass under your will and not including assets that pass by beneficiary designation or by operation of law. But some states have expanded estate to include all non-probate assets. Those states might try to collect your life estate value before you die.

Selling the Home During Your Lifetime Might Be a Problem.

Your percentage of sale proceeds may be an 'available resource' for Medicaid purposes and may disqualify you from benefits.

How to Do It

Gather Your Medicaid Eligibility Information Before Consulting An Attorney or Other Financial Professional.

Prepare a list of your assets (and those of your spouse) showing title, tax basis, and amount paid for each asset.

Write down your (and your spouse's) income from all sources.

Mention whether your resources are exempt or nonexempt or inaccessible for Medicaid purposes.

Write down all assets transferred in the last 60 months by gift, trust, life estate, or other means. Indicate date of transfer, transferee, purpose & consideration (what you got in return).

Seek out a Medicaid Law Attorney.

Many Occidental Petroleum employees and retirees cannot comprehend Medicaid laws on their own. Medicaid laws have changed over recent years. Indeed, as some planning vehicles are largely gone and most rules tightened, one might expect more changes in the years to come. Therefore, consult with an experienced Medicaid planning attorney. An attorney will explain your options, make recommendations, and make sure you would want to create a life estate.

Tax Considerations

Income Tax

Generally speaking, there should be no income tax consequences to transferring your residence as a life estate. But if the property generates rental income (e.g., a two-family house), the life tenant still must report the rental income and expenses on Schedule E of his or her federal income tax return.

Gift Tax

If you deed your home with a life estate, you have made a complete gift of the remainder interest. The gift would be the fair market value of the home at the time of the gift less your life estate value. But you may owe no federal gift tax because of the exclusion amount.

Estate Tax

With a life estate, the full FMV of the home will be included in your gross estate for the purpose of estate taxation.

Questions and Answers

If A Person Has A Life Estate In A Property How Is His or Her Share of Proceeds Calculated If The Property Is Sold During His or Her Lifetime?

If you own a life estate in real property and sell it during your lifetime, you get a cut of the proceeds at the rate of the life estate.

Example(s):  Suppose a 60-year-old woman transferred her home to her son three years ago under the terms of a life estate. She moved in with her son and wants to sell the house. The home she bought many years ago for USD 60,000 and now they have a buyer who will pay USD 200,000 for it. Assuming her life estate was worth about 74 percent of USD 200,000 and her son's remainder interest was worth 26 percent, the woman would receive 74 percent of USD 148,000. Her son would get 26 percent of USD 200,000, or USD 52,000.

Generally speaking, if you sell your principal residence at a gain, you can deduct all or part of the capital gain from taxation. If you meet the requirements, you can exclude up to USD 250,000 (USD 500,000 for married couples filing jointly) of the capital gain, regardless of your age. The gain is usually excluded only if you owned and lived in the home as your principal residence for two of the five years preceding the sale (the two years need not have been consecutive). A person or either spouse in a married couple generally can use this exemption only once every two years. You may still be partially exempt even if you fail these tests.

Special capital gain exclusion rules apply when you sell a partial interest in your principal residence - like a life estate -. If all the requirements are met, you can exclude gain on the sale or exchange of a partial interest in your principal residence if the interest sold or exchanged includes an interest in the dwelling unit. Only one maximum limitation of USD 250,000 (USD 500,000 for certain joint returns) applies however to the combined sales or exchanges of partial interests. Also known as one sale or exchange, sales or exchanges of partial interests in the same principal residence are treated as one sale or exchange. See 'IRS Publication 523 - Selling Your Home'

Sources:

1. Russo, Vincent J. 'Life Estates: Helpful or Problematic? (Part 3: Medicaid).'  Russo Law Group , 19 Feb. 2020, vjrussolaw.com/life-estates-medicaid. Accessed 23 Feb. 2025.

2. 'A Life Estate May Enhance Medicaid Eligibility, but You'll Need to Avoid Remainderman Issues.'  Legacy Assurance Plan of America , 19 Feb. 2020, legacyassuranceplan.com/article-life-estate-medicaid. Accessed 23 Feb. 2025.

3. 'Using Estate Planning to Prepare for Medicaid.'  ElderLawAnswers ,  www.elderlawanswers.com/using-estate-planning-to-prepare-for-medicaid-17425 . Accessed 23 Feb. 2025.

4. Lorrah, Paul. 'Life Estates And Medicaid Planning, What You Need To Know.'  Medicaid Planning | Medicaid Applications | Medicaid Plus ,  www.mymedicaidplus.com/life-estates-medicaid-planning . Accessed 23 Feb. 2025.

5. 'How Do Life Estate Deeds Impact Medicaid Eligibility?'  Law Offices of Bonnie M. Benson, P.A. ,  www.bonniebenson.com/articles/life-estate-deeds-medicaid-eligibility . Accessed 23 Feb. 2025.