New York Estate Planning & Elder Law Blog
Clients often ask whether the home should be deeded to the client’s adult children, while retaining a life estate in the parent or whether the Medicaid Asset Protection Trust should be used to protect the asset.
While the deed with a life estate will be less costly to the client, in most cases it offers significant disadvantages when compared to the trust. First, if the home is sold prior to the death of the Medicaid recipient, the life estate value of the home will be required to be paid towards their care. If the house is rented, the net rents are payable to the nursing facility since they belong to the life tenant. Finally, the client loses a significant portion of their capital gains tax exclusion for the sale of their primary residence as they will only be entitled to a pro rata share based on the value of the life estate to the home as a whole.
All of the foregoing may lead to a situation where the family finds they must maintain a vacant home for many years. Conversely, a properly drafted MAPT preserves the full capital gains tax exclusion on the sale of the primary residence and the home may be sold by the trust without obligation to make payment of any of the principal towards the client’s care, assuming we have passed the look-back period for facility care of five years.
It should be noted here that both the life estate and the MAPT will preserve the stepped-up basis in the property provided it is sold after the death of the parent who was the owner or grantor. Upon the death of the parent, the basis for calculating the capital gains tax is stepped up from what the parent paid, plus any improvements, to what it was worth on the parent’s date of death. This effectively eliminates payment of capital gains taxes on the sale of appreciated property, such as the home, after the parent dies.
There are instances where the life estate deed makes sense however. When the asset is a country house or a beach house that is intended to stay in the family for the next generation, then the life estate deed works perfectly well and may effect a significant savings to the family seeking to protect the asset.