LIFE ESTATE DEEDS
PROTECTING YOUR HOME FROM CREDITORS AND PROBATE

     One of the most commonly asked questions by those implementing their estate plan relates to how to protect the family home. There are generally 2 main concerns; avoiding Medicaid claims for nursing home costs, and avoiding probate, the legal process for the payment of debts and distribution of property at death. One effective way to protect your home from creditors and probate is through the use of a Life Estate Deed, also known as a “Lady Bird Deed”. Let’s examine how this strategy works.

     If you or your spouse enters a nursing home and applies for Medicaid benefits, there are limitations on the amount of income and assets a married couple can retain and still qualify for those benefits. If you are single, or if both you and your spouse enter a nursing home, even fewer assets can be retained. Essentially, the Medicaid program is intended for use by those who are unable to pay for their care.

     Certain assets are considered exempt from Medicaid claims. These include your home which is protected if your spouse or a dependent relative continues to reside in the home, or if you (or, your designated representative) states an "intent to return" home. The homestead will remain exempt during your lifetime if the above criteria is met, and will not be subject to Medicaid claims at your death if you have a surviving spouse or a dependent who is at home. However, if there is no healthy spouse or dependent living in the home, or if the healthy spouse predeceases you, the home may become subject to Medicaid claims at your death.

     What happens if you are single, own a home, have children and are planning to enter a nursing home? If you deed the home to your children in the hopes of protecting it from Medicaid claims, you will have made an uncompensated transfer and a penalty period will result.

     For example, Edith transfers her home worth $99,000 by quitclaim deed to her daughter, Veronica, so she can enter a nursing home and apply for Medicaid. Edith soon after applies for Medicaid. Even though Veronica is now the owner of the home, under the Medicaid rules, Edith will be disqualified from obtaining Medicaid benefits for 30 months based on the average nursing home cost of $3,300 per month and will need to pay for her nursing home costs for that 30 month period. In addition, Edith loses her property tax exemption and constitutional homestead protections because she no longer owns the home. Furthermore, Edith loses all control over the home, she cannot sell it or change the deed.

     Now let’s look at how you can to protect your home and still qualify for Medicaid benefits. Consider Wanda’s situation. Wanda is a widow, owns a home and has 2 children, Karl and Stan. Wanda is faced with entering a nursing home but is afraid she will lose her home to Medicaid claims. Wanda transfers her home, by Life Estate Deed, to Karl and Stan, but reserves the right to live in it for her lifetime and reserves other powers, including the right to sell the home. Wanda retains her homestead creditor protection and property tax exemption. In addition, the home is exempt from Medicaid claims during her lifetime, and Karl and Stan will receive the home free of Medicaid claims at Wanda’s death. As an added bonus, the home will pass to them automatically, without the need for probate.

     While the Life Estate Deed is not appropriate in every situation, if you transfer your home by Life Estate Deed, you can retain control and use of the property while at the same time protecting it from Medicaid claims and you can alter the deed at any time or sell the property if you wish. In addition, the title to the property automatically passes free and clear to those you have named on the deed avoiding the need for probate.

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