Legal Implications Of The Creation Of A Life Estate
The life estate in an NY Medicaid assets protection trust gives many benefits to the grantor and the grantees of the property meaning both to the person or persons that would retain an ownership interest in the home prior to death and after the life tenant has passed on.
Generally this means for example mom passes the house to the son and or daughter, and mom retains a life estate interest in the property, mom gets (1) the protection that she can never be removed from the property if she should have a falling out with her children, meaning the children can’t kick mom out of the house. (2) The 5 year look back penalty starts to run once the transfer takes place so that the house can be protected from Medicaid. (3) Upon mom’s death, the title to the house then is vested completely with the children which mean no need for an expensive time-consuming NY probate or NY administration court proceeding to pass ownership of the home to the children. (4) The children would receive a step-up tax basis in the property, which means they would get the date of death value of the home upon their parent’s death. For example, if mom passed away today, and the house was valued at $500,000, and the next day the son or daughter wanted to sell the house because the life estate has been extinguished by mom’s death, they would be entitled to sell the property and would get the date of death value of $500,000 for capital gains purposes. Technically, there would be no capital gains tax, because the step-up in basis would mean that the house would be sold at the $500,000 basis. These are all important aspect of creating a life estate in a Medicaid asset protection trust. (5) Another advantage of the Medicaid asset protection trust over outright transfers is that the assets are segregated and protected against lawsuit, creditors, bankruptcy and divorce issues that your children may possibly have.
What happens during the future sale of a residence when the property is actually held by the NY Medicaid asset protection trust as opposed to having a property with a deed containing a life estate? When the house or the property is put into the Medicaid asset protection trust, the trust gives flexibility, so the property can in fact be sold prior to the death, before entering into a nursing home, or while in the nursing home.
This would allow for the complete proceeds of the sale of the home would be placed back into the trust, and be protected. It would not adversely affect an individual’s ability to gain entrance into a nursing home, or to apply for New York Medicaid, and be accepted, because the value of the entire property would be protected and no penalty would be assessed so long as it has been in the trust for at least 5 years. Therefore, the life estate interest and the full value of the whole house that is included in the trust language are protected. So once again, this is why moving the property into the NY Medicaid asset trust is the preferred method as opposed to maintaining a life estate interest in the deed, and not having a Medicaid asset protection trust. In addition, the Medicaid asset protection is not just limited to holding your primary residence, but the Medicaid asset protection trust can hold other assets, anything except for any qualified IRA or 401(k) plans. This is the preferred method of protecting such assets in order to get the five-year, or sixty-month look back penalty period started.
Once again, the Medicaid asset protection trust would be the preferred method of protecting not only your primary residence, but would include any and all other real property, be it investment, or vacation homes etc. and any and all other assets to include cash, savings, CD, stocks, bond, mutual funds, annuities etc.
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