Enhanced Life Estate Deeds (a.k.a., "ladybird deeds") and Medicaid Asset Protection Trust are both tools that may be used for protecting real estate from future Medicaid claims. So what are the differences between them and why might you use one over the other?
What is an Enhanced Life Estate Deed?
A traditional life estate is when a person transfers their property to someone else (referred to as the “remainderman”), but retains the right to live there for the remainder of their lifetime. For example, a parent might transfer their home to their child, but the parent retains the right to live in the home for the remainder of the parent’s lifetime. The problem with a traditional life estate is that if the parent later changes their mind and wants to recover or sell the property, the parent cannot do so without the child’s agreement. In addition, if the property is sold, the proceeds from the sale must be divided between the parent and the child based upon the parent’s actuarial life expectancy. A traditional life estate also constitutes a penalized transfer for Medicaid purposes that is subject to the 5-year Medicaid look-back period.
With an enhanced life estate (often referred to as a “ladybird deed”), a person transfers their property to someone else, but retains the right to live there for the remainder of their lifetime and the person also retains the right to sell, mortgage, transfer, or reclaim the property without the permission of the remainderman. Because nothing has vested in the remainderman, there has not been a completed “transfer” for Medicaid purposes, so an enhanced life estate does not create a penalty for Medicaid purposes even if it was created within the 5-year Medicaid look-back period.
Lastly, when the lifetime owner (i.e., the parent) dies, the property is not subject to Medicaid Estate Recovery—the process whereby Medicaid seeks to be reimbursed from the deceased Medicaid-recipients estate.
What is a Medicaid Asset Protection Trust?
Generally, a Medicaid Asset Protection Trust (MAPT) is a trust designed to hold assets and begin the 5-year look-back period for future Medicaid eligibility purposes. A MAPT is not subject to Medicaid Estate Recovery upon the death of the Medicaid recipient.
What Are the Advantages of a Ladybird Deed?
Currently, a Ladybird Deed does not create a Medicaid transfer penalty for Medicaid-eligibility purposes.
What Are the Disadvantages of a Ladybird Deed?
Lack of Flexibility.
Enhanced life estates are significantly less flexible than a Medicaid Asset Protection Trust. If the home is sold, most of the proceeds from the sale become countable for Medicaid purposes. While you may not envision selling your home in the future, we can tell you from our experience, that it often becomes an issue down the road. Here's how it has played out with past clients: At some point there is a health decline and the client is no longer able to live independently. The client moves into a into an independent living community, assisted living community, or skilled-nursing facility and the home is left sitting vacant. The adult children don't have the time, money, or energy to maintain the home while also taking care of their parent and their home family and they eventually come back to us wanting to sell the home and we have to remind them that if the home is sold, the proceeds will potentially be countable for Medicaid-eligibility purposes.
No Protection for Your Assets.
An enhanced life estate leaves the real estate outright to your beneficiary and thus, unprotected from your beneficiary’s lawsuits, creditors, or divorce.
It Might Not Work!
Risks that Enhanced Life Estates won't work in the future. We generally do not recommend using of enhanced life estates for “pre-planning” clients (i.e., clients that are not expected to need skilled nursing care within the next few years). While the enhanced life estate deeds currently work as a Medicaid planning tool and we use them sometimes with our “crisis planning” clients (i.e., clients that need care now or will need care in the very near future), we have concerns about whether they will continue to work for Medicaid planning purposes.
Medicaid is Federal law implemented by the states. This means that we need to pay close attention to both State and Federal laws and trends. Currently, North Carolina Medicaid Estate Recovery is limited to the Medicaid-recipient’s probate estate. Because enhanced life estate deeds are not part of the probate estate, they are protected from Medicaid Estate Recovery. Federal law, however, allows the states to take a broader definition of what is included in Medicaid Estate Recovery and many states have already opted to do so. In looking at national trends, we have significant concerns about whether Enhanced Life Estates will still subject to Medicaid Estate Recovery in the future and therefore, they may not be a viable Medicaid planning tool in the future. If such a change is made, we do not expect past Enhanced Life Estates to be “grandfathered in”—meaning that your home could still be at risk in the future if the rules change.
What Are the Advantages of a Medicaid Asset Protection Trust?
Proceeds from the sale of the real estate will be protected for Medicaid purposes (subject to the 5-year Medicaid look-back period) allowing for greater flexibility if the home needs to be sold in the future. If the real estate is sold in the future, the proceeds from the sale can remain in the trust and continue to be protected for Medicaid-eligibility purposes.
Other assets can also be transferred into a MAPT. Other assets such as savings or brokerage accounts, life insurance with cash value, or annuities that are not within a retirement account, may also be transferred to a MAPT.
A MAPT can offer greater protection for your beneficiaries. If you leave everything to your beneficiary outright, the inheritance is unprotected if your beneficiary should get sued, become disabled, go through a divorce, or similar. With a MAPT, you have the option to leave things to your beneficiary protected from future lawsuits, creditors, disability or divorce. At the same time, your beneficiary can still enjoy access and control over the inheritance.
Less Vulnerable to Future Law Changes.
Overall, we feel that it is more likely that a MAPT will still be a viable Medicaid planning tool. The laws regarding trusts are much more firmly established and go back to English common law. As elder law attorneys, we tend to be very conservative with how our trusts are drafted to reduce the likelihood that future law changes would impact whether the trust still works from a Medicaid protection point of view. While there is a pretty clear path to eliminating the use of Enhanced Life Estate deeds (as discussed above), we feel that the likelihood of a MAPT no longer working in the future is far lower.
For crisis planning clients that need care now or in the very near future, then the Enhanced Life Estate may be the appropriate solution. Otherwise, for pre-planning clients that do not currently need nursing home care, if you expect it to be more than a year or two before needing care, then it may make more sense to start with a Medicaid Asset Protection Trust and start the 5-year look-back period. If you wind up needing care sooner than 5-years, there are options for modifying or terminating the trust and reverting back to a Ladybird Deed, but in the event that Ladybird Deeds no longer work, you'll already have a head start on your 5-year look-back period.
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