By: Anthony J. Enea, Esq.*
It appears that one of the unintended consequences of the enactment of the Deficit Reduction Act of 2005 ("DRA") and its significant changes to the rules for Medicaid eligibility and look back period may be that more and more adult children and their parents will be living under one roof. It may one day be said that the enactment of the DRA led to the re-emergence of the nuclear family in America.
Prior to the enactment of the DRA there was little incentive for a parent to purchase a life estate interest in the home of a child or another individual. There existed a significant concern that Medicaid would argue that part, if not all, of the purchase price paid was a non-exempt transfer of assets which created a period of ineligibility for Medicaid. However, pursuant to the provisions of the DRA as codified in 42 U.S.C. 1396 p (C)(I)(J), if one purchases a life estate interest in the home of another, it will still be treated as a transfer of assets for Medicaid eligibility purposes, unless the purchaser resides in the home for at least one year after the date of purchase.
The DRA makes it sufficiently clear that if the purchaser resides in the home for at least one year (365 days which are not required to be consecutive) after the purchase of the life estate for full consideration, the purchase price paid will not be considered a non-exempt transfer of assets for nursing home Medicaid eligibility purposes. Because the DRA enacted a significant look back period (5 years) and a lengthy ineligibility period for transfers made within the look back period, the "safe harbor" created by the purchase of a life estate may become a highly effective option in the long term care planning for seniors. Clearly having mom and dad residing in your home for at least one year, in spite of its inherent pitfalls, may be a much more desirable option than having their assets depleted by the cost of long term care.
Obviously, the purchase of a life estate would require a well drafted agreement as well as an analysis of the tax impact of such a sale. From a tax perspective it would be necessary that a fair market value appraisal of the house be done, and that the life estate interest of the purchaser be valued. Historically, Medicaid has utilized the Health Care Financing Administration Tables (HCFA) in valuing a life estate and remainder interests in real property. The HCFA tables place a greater value on the life estate interest than do the IRS tables. It is anticipated that the HCFA tables will again be used by Medicaid.
From a capital gains tax perspective, the Seller of the life estate interest will be subject to the capital gains tax rules and may need to utilize part or all of his or her §121 IRC Personal Residence Exclusion ($250,000 if single, $500,000 if married) to the extent of the gain attributable to the sale of the life estate. While this may be an adverse tax consequence, the protection of a significant amount of assets without creating any period of ineligibility for Medicaid may have an overriding beneficial effect. Furthermore, seniors in general will likely benefit from being able to reside in the home of a loved one rather than in a nursing home.
Finally, the DRA may also result in many children, especially empty nesters, deciding to reside in the home of their parents so that the parent's home can be transferred to them as a "caretaker child" exempt transfer (no period of ineligibility) for Medicaid purposes. The caveat being that the child must reside in the home for at least two (2) years immediately prior to the parent's institutionalization.