The phrase “life estate” often comes up in discussions of estate and Medicaid planning, but what exactly does it mean? A life estate is a form of joint ownership that allows one person to remain in a house until his or her death, when it passes to the other owner. Life estates can be used to avoid probate and to give a house to children without giving up the ability to live in it. They are sometimes suggested for use in Medicaid planning.
In a life estate, two or more people each have an ownership interest in a property, but for different periods of time. The person holding the life estate — the life tenant — possesses the property during his or her life. The other owner — the remainderman — has a current ownership interest but cannot take possession until the death of the life estate holder. The life tenant has full control of the property during his/her lifetime and has the legal responsibility to maintain the property as well as the right to use it, rent it out, and make improvements to it.
The life tenant cannot sell or mortgage the property without the agreement of the remaindermen. If the property is sold, the proceeds are divided up between the life tenant and the remaindermen. The percentage shares are determined based on the life tenant’s age at the time using life expectancy tables that assign a percentage to the life estate depending on the age.
Be aware that transferring your property and retaining a life estate can trigger a Medicaid ineligibility period if you apply for Medicaid within five years of the transfer. The remainder portion is considered to have been transferred to the remainder persons on the deed. Many years ago, it was argued that the life estate had no market value and, thus, it was not countable as a resource. This argument has failed in Ohio. Thus, creating a life estate actually presents a problem when the person has applied for Medicaid thinking they are eligible because they have spent down to less than $2000. The life estate will have a value that is probably more than $2000. In short, use of a life estate deed is not a good planning option in Ohio for purposes of Medicaid eligibility.
When the life tenant dies, the house will not go through probate, since at the life tenant’s death the ownership will pass automatically to the holders of the remainder interest. However, in Ohio a life estate is included in the definition of the estate which is subject to Medicaid estate recovery. There have been a few cases in Ohio ruling on this issue of a life estate and estate recovery. One case held a life estate was subject to estate recovery and the other that it was not. However, the portion of the property that is subject to estate recovery is only the life estate portion. Thus, the full value of the property is not exposed to recovery.
In summary, life estate deeds are not good planning tools in Ohio for purposes of Medicaid eligibility or estate recovery.