An estate for life! (Or, the life estate.)

As many farmers and ranchers consider retirement, a question frequently asked is about the intersection of retirement income, assets, and health care costs.  When this question is asked, it is immediately followed by “but my neighbor kept their land and is on Medicaid.  How does that work?”

While I cannot speak for every possible estate plan out there, the most likely answer is the use of a life estate.  The formal definition of a life estate is an estate that is held for the duration of a person’s life and then passes to the remainderman.  What is the plain English definition?

That requires a bit more words.  In a life estate, the owner of property deeds the ownership to another person (“remainderman”, which for clarity sake, can be a woman or multiple people) but retains an income interest for the remainder of his or her life.  In other words, the “owner” controls the property for the remainder of his or her life, including receiving income from the property, but at the time of death, the property automatically passes to those people named by the owner when he or she made the life estate deed.

Why do some people employ a life estate deed?  In order to qualify for Medicaid.  But it can’t be that simple, can it?

No, it can’t.  First, Nebraska Health and Human Services employs what is termed a “look back period” to determine if any assets were transferred by the applicant at less than fair market value.  This look back period is 60 months, or five years.  If any transfers, such as a life estate, occurred within 5 years of the application for Medicaid, a person is denied Medicaid coverage for the number of months the fair market value of the asset would provide care.

Also, keep in mind that a life estate is irrevocable.  You cannot change your mind about the life estate deed.  The only exception to this is if the remainderman also agree to revoke the life estate deed, which is not likely to occur.  Additionally, the remainderman have an ownership interest in the property.  That means creditors of the remainderman can possibly come after the property.

Obviously, there is much more to this and the above is for informational purposes only.  If you are a South Dakota or Nebraska farmer or rancher and have questions, feel free to contact us.

2 thoughts on “An estate for life! (Or, the life estate.)

  1. Is it true that if you are the remainderman and you finally get deed to the land and decide to sell it someday, you have to pay capital gains going way back? Thanks!

    • A simple question with a somewhat complicated answer! You and/or your accountant will likely want to take a look at Internal Revenue Code section 2036. Because a life estate is typically included in the taxable estate of the decedent, the property subject to the life estate receives a ‘step-up’ in basis, meaning the value of the property at the time of the decedent’s death. But, the above is a general answer for informational purposes only. Advice from a tax professional, such as your accountant, with the full details of when and how the life estate was created, as well as the state and federal tax laws, is worth your time.

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