In the all the breathless hype over the past weeks regarding the demise of enhanced life estate—or so-called “Lady Bird”—deeds was lost a critical fact—that this technique was rarely the best option in Medicaid planning anyway.
First, the story known to some readers. After an unsuccessful attempt last year, this year the State agency which administers the Medicaid program was able to have legislation enacted which banned the future use of enhanced life estate deeds. Specifically, the legislation disallows an exemption of the home of a Medicaid recipient if it is titled to such an enhanced life estate deed recorded after June 30, 2014.
This pending date caused some attorneys to send mailings suggesting that action be taken before this “deadline” came and went.
I met with several of clients who had received these mailings. In each of these instances, I recommended that the clients not execute an enhanced life estate deed, but instead utilize a “traditional” life estate deed.
But how can this be? By definition, if the State is no longer allowing this technique, it must be most desirable, right?
Not necessarily. To understand why, the brief story not known to most readers—that of the approximately fourteen year life cycle of the enhanced life estate deed-will be helpful.
In August, 2000, the Rhode Island Department of Human Services (DHS), the State agency that administers the Medicaid program in Rhode Island, announced its intention to issue regulations which would prohibit the use of revocable living trusts holding title to a principal residence for Medicaid purposes. This was bad news, though expected, as DHS had been considering this for many years.
The reason: holding a principal residence in a revocable trust was a nearly ideal scenario. Since the trust was revocable, and the “settlors” of the trust (the property owners) were the only beneficiaries and were often trustees of the trust during their lifetimes, they essentially lost no control over their principal residence during their lifetimes.
Then why do it? Because it created, through the nomination of successor trustees, a smooth asset management technique in the event that one or both of the settlors/trustees became incapacitated. Even more importantly to clients, assuming proper titling of the property to the trust, it avoided the need for probate administration of the property upon the second of the settlors to die.
Probate in Rhode Island, assuming typical assets and a relatively intact family situation, is not the nightmare that clients have heard (or occasionally experienced as beneficiaries). Nevertheless, it turned out that this use of revocable trusts for holding title to a principal residence also had benefits for Medicaid planning. This is because, in the mid-1990s, the federal government forced Rhode Island and other states to institute so-called “estate recovery” techniques to seek to recover the cost of Medicaid following a Medicaid beneficiary’s death.
Rhode Island, like the majority of other states, opted to comply with the federal government’s requirement by limiting its estate recovery efforts to the probate estate. To expand the estate recovery to non-probate assets, Rhode Island and most states reasoned (and continue to reason), would require substantially greater expenditure of personnel and other state resources for potentially uncertain gains.
Thus, after the mid-1990s in particular, avoiding probate administration for a principal residence of a Medicaid recipient became particularly important. And since the use of revocable living trusts had all these other virtues, it became one more reason to consider their use for clients.
The Rhode Island Department of Human Service, has had been (and continues to be) fair-minded when it comes to considering people who made plans under the rules then in effect. For example, in response to comments by me and others, it “grandfathered” revocable trusts created on or before December 1, 2000, the effective date of its regulation.
Seeking an alternative, a technique known as the Lady Bird deed was imported from Florida. (Ironic, isn’t it, since most Rhode Islanders mostly mitigate in the opposite direction!) It was called a Lady Bird deed because a Florida attorney describing it used Lady Bird Johnson as a character in hypothetical fact situation.
I have always preferred to describe it by its proper name—an enhanced life deed—because it is easier to explain to a client. I find that clients generally can understand the concept of a “life estate deed”—that is, when you transfer property to a third party and reserve the ability to live in, use, enjoy, rent and do pretty much whatever you want to do with the property while you are living. (I generally prefer that the third party to whom the property is transferred is an irrevocable trust, but that’s a topic for another day.)
The modifer “enhanced” means that those rights transferred—to keep a portion of the proceeds of the property if it is sold during the life estate holder’s lifetime, or even requiring the third party’s permission for such a sale—are in fact not given away.
Got it? Well, it’s more complicated and generally took longer for clients to get their minds around than a “traditional” life estate. However, in limited situations–generally crisis planning involving single people–it was an excellent tool and hence we recommended and utilized it on a number of occasions.
However, what made it work in crisis planning—that effectively no transfer for Medicaid purposes occurred—also made it generally ill-suited to non-crisis planning. Take for example a widow—let’s call her Hope–in her early 80s in relatively good health, with no near turn plans to sell her home and with a modest amount of other assets. If Hope transfers title to her home using a traditional life estate, that transfer is subject to a potential five year “lookback period” for Medicaid eligibility should she require nursing home care.
However, if Hope utilized the enhanced life estate deed, that transfer is not subject to any potential penalty period for Medicaid eligibility purposes. That’s better, right?
Well, assume that Hope three years into the five year lookback period sells her home and moves to an assisted living facility for which she is paying privately. And then two years later, Hope suffers a stroke and requires nursing home care.
Had Hope utilized the enhanced life estate deed, 100% of the proceeds of that sale would be exposed to spenddown for nursing home costs. Conversely, had she utilized a traditional life estate—one in which she transferred an interest in the property to an adult child as trustee of an irrevocable trust—a substantial portion of the sale proceeds would be protected in the irrevocable trust from exposure for nursing home costs.
I will miss reaching into my Medicaid planning toolbox and pulling out the enhanced life estate deed to solve a problem created by a single person with little or no chance of making through a five year lookback period, and with limited non-home assets capable of getting him or her through the five year period. However, in many other circumstances—for example, a married couple or a relatively healthy single person like Hope—there were always better alternatives.
Fortunately, those alternatives still exist even after the Lady Bird deed technique flies away. However, the lack of being able to pull this tool out when needed puts more of a premium on clients, particularly single persons, to initiate planning in advance in order to get a jump on the five year lookback period for Medicaid eligibility.