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Did you know that transferring your residence subject to a life estate can have potential tax benefits for HP employees and retirees? When the property is sold during your life, your share of the proceeds is determined based on the value of your life estate. This means that you may be able to exclude a portion of the capital gain from taxation if you meet the requirements. By utilizing this strategy, you can potentially minimize the tax burden when selling your home and maximize the financial benefits of your residence transfer.
Introduction
Our HP clients frequently face the challenge of preserving their residences while also qualifying for Medicare. A transfer subject to a life estate can be used to preserve your residence and increase your Medicaid eligibility. You transfer the 'remainder interest' in your home to your offspring (or other beneficiaries) and retain a 'life estate' for yourself using this estate-planning device. As a matter of convenience, you deed the property to the remainder beneficiaries and include language in the deed to retain your life estate. The life estate grants you the legal right to reside in the residence for the remainder of your life. As the 'life tenant,' you remain responsible for paying all ordinary and necessary property maintenance costs, such as property taxes, insurance, utilities, and routine repairs. The home transfers to the remainder beneficiaries upon your passing.
The benefit of this arrangement is that you can remove a significant portion of your home's value from your financial profile for Medicaid eligibility purposes and abbreviate any period of ineligibility while retaining your right to reside in the home. Many of our HP customers have found success with this potent retirement tool.
How Does It Work?
Remainder Interest Not Countable As Available Asset for Medicaid Eligibility Purposes
In order to qualify for Medicaid, both your income and the value of your other assets must fall below state-specific limits. In determining your Medicaid eligibility, a state may only consider the income and resources legally available to pay for your medical expenses.
A transfer subject to life estate can help you qualify for Medicaid by rendering your home's remainder interest unavailable to you (and, therefore, to the state) once any period of ineligibility expires. Nonetheless, the life estate is considered an available asset. Medicaid employs a 'Life Estate and Remainder Table' to determine the value of your life estate based on your life expectancy and the value of your residence. In addition, because you retain an interest in the property, any period of ineligibility will be shorter than if you had completely conveyed the property.
Caution: if you (or, if married, both you and your spouse) enter a nursing home, the life estate still grants you the right to reside in the home for the remainder of your life. If you are unable to return home, however, the residence could (and perhaps must) be rented, and the net rental income would be applied to your nursing home expenses.
Preserves Home for Your Beneficiaries
In addition to helping, you qualify for Medicaid; a life estate may also help you preserve the home for your heirs. The home transfers directly to the remainder beneficiaries upon death; it is not part of the decedent's probate estate, and states cannot typically seize it under estate recovery theories. Numerous HP clients have deemed this to be desirable.
Caution: Some states have adopted a broader definition of an estate that includes non-probate assets in which you have an ownership interest at the time of your demise. These states place a lien on your home to collect the value of your life estate at the time of your demise.
Shortens Any Period of Ineligibility
Despite the fact that the residence transfer subject is a powerful instrument for HP employees and retirees, there is an ineligibility period. As with any transfer of assets for less than fair market value, a gift of the remainder interest in your property can result in a waiting period or period of ineligibility prior to Medicaid eligibility. When you register for Medicaid, the state has the right to review your (and your spouse's) finances for a period of months preceding the date of your application. The look-back period for transfers made on or after February 8, 2006 is sixty months. Therefore, if you give away a house (or a remainder interest in the house) within 60 months of the date you register for Medicaid, you may be ineligible for Medicaid for a set number of months, determined by a state-mandated formula. This formula can be described as the value of the remainder interest (from actuarial tables) divided by the average monthly cost of nursing facilities in your area, with the quotient representing the number of months for which you will be ineligible for Medicaid benefits. Because only the valuation of the remainder interest is factored into the calculation, the period of ineligibility will be shorter than if the entire property had been transferred.
Strengths
Preserves Your Right to Live In the Property for Life
Numerous HP employees and retirees place a high priority on preserving their legal right to reside in their own residence. If you give your home to your offspring without reserving a life estate, you forfeit the right to continue living there. Consequently, if your children divorce or owe money to creditors, the house will be sold and you will be left without a place to reside. By contrast, reserving a life estate preserves your right to reside in the home. Even if your child sells his or her remainder interest in the property, the buyer cannot assume possession of the property until your demise.
Avoids Probate
The property transfers directly and automatically to the remainder beneficiaries upon your death, thereby avoiding the expense and delay of probate.
Preserves Assets for Your Loved Ones (In Some States)
Many states seek reimbursement from your estate for Medicaid benefits they paid on your behalf after your demise. In certain jurisdictions, 'estate' refers exclusively to your probate estate. Since any assets transferred pursuant to a life estate arrangement would be removed from your probate estate, these states would be unable to seek title to those assets. Therefore, the assets would be preserved for your family. This eliminates a major concern of many HP employees and retirees, namely that the state will seize the assets they wish to pass on.
Helps You Qualify for Medicaid
A transfer subject to a life estate helps you qualify for Medicaid by rendering your remainder interest in your home unavailable to you (and, therefore, to the state) for Medicaid eligibility purposes once any period of ineligibility expires. Additionally, any period of ineligibility is reduced because the value of your retained interest is excluded from the calculation.
Minimizes Gift Tax on the Transfer
If you deed your property and retain a life estate, your gift of the remainder interest will be complete. The value of the gift is the home's fair market value at the time of the gift, less the value of your life estate. However, you may not actually be required to pay federal gift tax if it can be mitigated by your exclusion amount.
Provides Your Children with a Stepped-Up Basis
The tax benefits that transferring a residence to a life estate can bring to a beneficiary in the future is an additional factor that is frequently considered by HP employees and retirees. Your offspring (or whoever you name as remainder beneficiaries) are treated as if they inherited your property for income tax purposes. In other words, your children may use the property's fair market value on the date of your death as the premise for calculating their capital gain on a subsequent sale. This type of basis is known as a stepped-up basis.
Assume John paid $70,000 for his residence twenty-five years ago. He reserved a life estate in the property and granted Mary the remainder interest. The value of John's property upon his demise is $250,000. There will be no capital gain if Mary sells the property for $250,000, as she will have a 'stepped-up' basis of $250,000. Mary's basis would be $70,000 if John had merely given the house to her without reserving a life estate. She would report a $180,000 capital gain.
Tradeoffs
Loss of Control Over Asset
Your donation of the remainder interest cannot be revoked. This means that once the property has been transferred, you no longer have legal control over its ultimate disposition.
Value of Life Estate May Be Subject to Medicaid Estate Recovery in Some States
After your death, your state may seek reimbursement from your estate. For Medicaid purposes, the word 'estate' has traditionally been interpreted by the majority of states as your probate estate; that is, it has been interpreted by the majority of states as excluding assets that pass by beneficiary designation or by operation of law. However, some jurisdictions have adopted a definition of estate that includes non-probate assets as well. These states may exercise their authority to collect the value of your life estate just prior to your passing.
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Sale of the Home During Your Lifetime May Be Problematic
Your percentage of the sale proceeds may be considered a 'available resource' for Medicaid eligibility purposes, disqualifying you from benefits.
How to Do It
Gather Your Medicaid Eligibility Information Before Consulting An Attorney or Other Financial Professional
- Prepare a list of all your assets (and those of your spouse) that includes the manner in which title is held, the tax basis, and the purchase price.
- Prepare an inventory of all of your (and your spouse's) sources of income.
- Indicate whether your resources are exempt, non-exempt, or inaccessible for Medicaid purposes.
- Compile an inventory of all assets transferred within the past sixty months, whether by gift, trust, or other means. Indicate the transfer date, recipient, purpose, and consideration (what you received in exchange).
Consult a Medicaid Law Attorney
Many HP employees and retirees find it difficult to comprehend Medicaid laws on their own. Medicaid laws have endured a number of changes in recent years. Given that certain planning vehicles have been eliminated and the majority of rules have been tightened, it is reasonable to anticipate that additional changes will occur in the coming years. Consultation with an attorney experienced in Medicaid planning is essential. A lawyer will explain your options, offer suggestions, and ensure that establishing a life estate is in your best interest.
Tax Considerations
Income Tax
Generally, there should be no income tax consequences of transferring your residence subject to a life estate. However, if the property generates rental income (e.g., a two-family house), the life tenant will continue to be responsible for reporting the rental income and expenses on Schedule E of his or her federal income tax return.
Gift Tax
The transfer of your residence pursuant to a life estate should generally not have any income tax consequences. Nonetheless, if the property generates rental income (e.g., a two-family home), the life tenant remains responsible for reporting rental income and expenses on Schedule E of his or her federal income tax return.
Estate Tax
For estate tax purposes, the full FMV of the residence will be included in your gross estate if you have a life estate.
Questions & Answers
When A Person Has A Life Estate In A Property, How Is His or Her Share of Proceeds Calculated When The Property Is Sold During His or Her Life?
How Is a Person's Share of Proceeds Calculated When the Property Is Sold During His or Her Life if He or She Has a Life Estate?
Three years ago, a sixty-year-old widow transferred her home to her son, subject to a life estate. She has decided to move in with her son, and they intend to sell the home together. She purchased the residence for $60,000 many years ago, and they now have a suitor willing to pay $200,000 for it. Assuming her life estate is worth approximately 74% and her son's remainder interest is worth 26%, the woman's share of the proceeds would be 74% of $200,000, or $148,000. Her son's share of $200,000 would amount to $52,000, or 26%.
If you sell your primary residence for a profit, you may be able to exclude all or a portion of the capital gain from taxation. Regardless of your age, if you satisfy the requirements, you can exclude up to $250,000 (or up to $500,000 for married couples filing jointly) of your capital gain. You can generally exclude the gain only if you owned and occupied the property as your primary residence for at least two of the five years preceding the sale (the two years do not have to be consecutive). Generally, a person or either spouse in a married couple can only claim this exemption once every two years. However, you may be eligible for a partial exemption even if you do not meet these requirements.
When you transfer a partial interest in your primary residence (such as a life estate), you are subject to special capital gain exclusion rules. Assuming all requirements are met, you may exclude gain from the sale or exchange of a partial interest in your principal residence if the partial interest includes a dwelling unit interest. However, only one $250,000 ($500,000 for certain joint returns) maximum limitation amount applies to the combined sales or exchanges of partial interests. In other words, partial interests in a single principal residence are regarded as a single sale or exchange. Refer to IRS Publication 523, Selling Your Home, for more information.
Conclusion
Imagine you're preparing a delicious homemade pie for your family. As the head chef, you want to ensure that everyone gets a fair slice while also saving some for yourself. In a similar way, transferring your residence subject to a life estate is like dividing the pie. You pass on the ownership of the pie to your children (or other beneficiaries) while reserving a slice for yourself. This not only allows you to continue enjoying the comfort of your home but also helps you qualify for Medicaid benefits by reducing the value of your assets. It's a smart and strategic way to secure your residence and safeguard your future while still savoring a piece of the pie.
How does HP Inc. ensure that the pension plan benefits will remain stable and secure for employees in the future, and what measures are being implemented to mitigate financial volatility associated with these benefits? Employees of HP Inc. should be particularly aware of how the transition of their pension payments to Prudential will affect their financial security and what protections are in place to ensure that these payments are maintained without disruption.
HP Inc. ensures pension plan benefits remain stable and secure by transferring the payment obligations to Prudential, a highly-rated insurance company selected through a careful review by an Independent Fiduciary. This move is aimed at reducing financial volatility associated with HP's pension obligations while maintaining the same benefit amount for retirees. Prudential's established financial stability provides additional security to employees(HP Inc_November 1 2021_…).
What specific details can HP Inc. employees expect to learn in the Welcome Kit from Prudential, and how will these details help them understand their new payment system? HP Inc. pension participants will need to familiarize themselves with the information outlined in the Welcome Kit to make informed decisions regarding their pension benefits going forward.
The Welcome Kit from Prudential will provide HP Inc. employees with instructions to set up an online account, along with details on managing payments, tax withholdings, and other resources. This information will allow employees to familiarize themselves with Prudential’s system and ensure a seamless transition without disruptions(HP Inc_November 1 2021_…).
In what ways does the selection process for Prudential as the insurance provider reflect the commitment of HP Inc. to the well-being of its employees? Understanding the rationale behind this decision will give HP Inc. employees insights into the fiduciary responsibilities and governance processes that protect their retirement benefits.
The selection of Prudential reflects HP Inc.'s commitment to employee well-being, as it involved the Independent Fiduciary conducting an extensive review of insurance providers. Prudential was chosen based on its financial strength and ability to manage pension payments securely, showing HP's focus on protecting retirement benefits(HP Inc_November 1 2021_…).
How will the annuity payments from Prudential differ from the previous pension payments in terms of tax implications and reporting for HP Inc. employees? It is crucial for employees of HP Inc. to comprehend the tax treatment of their new annuity payments to avoid any potential pitfalls in their personal financial planning.
The annuity payments from Prudential will be taxed similarly to the previous pension payments, though employees will receive two separate 1099-R forms for 2021 (one from Fidelity and one from Prudential). For future years, only a single form will be issued. This ensures employees are aware of how to manage tax reporting(HP Inc_November 1 2021_…).
What resources are available to HP Inc. employees seeking assistance regarding their pension benefits, and how can they effectively utilize these resources to address their concerns? Knowing how to access support and guidance will empower HP Inc. employees to manage their retirement benefits proactively.
HP Inc. employees seeking assistance can access live customer support through Fidelity or contact Prudential directly after the transition. Additionally, the Welcome Kit will include important contact information for managing their benefits, making it easy for employees to address concerns(HP Inc_November 1 2021_…).
How can HP Inc. employees verify the financial health and stability of Prudential, and why is this factor important in the context of their pension benefits? Employees must ask how Prudential's financial standing influences their view of long-term pension security and what metrics or ratings they should consider.
HP Inc. employees can verify Prudential’s financial health by reviewing Prudential's annual financial reports, which are publicly available. Prudential’s strong financial ratings were a key factor in its selection, assuring employees of long-term pension security(HP Inc_November 1 2021_…).
What steps should HP Inc. employees take to update their personal information, such as banking details and tax withholding preferences, following the transition to Prudential? Understanding these processes will ensure a smooth continuation of benefits for HP Inc. employees as they adapt to the new system.
Employees do not need to re-submit their personal information to Prudential, as HP will securely transfer all necessary data, including banking and tax withholding preferences. This ensures the continuation of pension payments without the need for employee intervention(HP Inc_November 1 2021_…).
How does HP Inc. plan to address potential changes in the financial landscape that may affect pension benefits, and what role does the insurance contract with Prudential play in this context? HP Inc. employees should be informed about the company's strategic outlook and how it aims to safeguard pension assets against economic uncertainties.
HP Inc. plans to address potential financial changes through its contract with Prudential, which guarantees pension payments will remain the same. Prudential manages these risks as part of its core business, providing added security against economic volatility(HP Inc_November 1 2021_…).
In what circumstances might HP Inc. employees see changes in their net pension payments following the transition to Prudential, despite assurances that payment amounts will remain unchanged? This understanding will help employees manage their expectations regarding future payments and any adjustments they may need to make.
Employees might see changes in their net pension payments due to tax adjustments or changes in withholding instructions, but the gross payment amount will remain unchanged. Any garnishments or other deductions will continue as before, ensuring consistency in payment structure(HP Inc_November 1 2021_…).
How can HP Inc. employees contact the company directly to learn more about the pension transition process, and what channels are available for them to have their questions addressed? Clear communication lines are essential for HP Inc. employees to ensure they receive timely and relevant information regarding their pension situations.
HP Inc. employees can contact the company through the Fidelity support line or directly through Prudential for any questions about the pension transition. The Welcome Kit and other resources will provide contact details, ensuring employees have access to timely support(HP Inc_November 1 2021_…).
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