The Medicaid law has always enacted a period of ineligibility for gifts or uncompensated transfers made by an applicant prior to an institutional Medicaid application. What is a gift as opposed to a compensated transfer is often the subject of dispute. However, the new law specifically spells out a transfer of assets that will be considered a compensated transfer and, therefore, will not result in a period of ineligibility. If an applicant for institutional care has transferred money in exchange for a life estate in the premises of another individual, and if the applicant can show that they have lived in said premises for at least 12 months, then the amount spent, as long as it is calculated based on the age of the life estate holder and the value of the home, will be considered a reasonable expenditure and not a gift. Therefore, the transferred amount will not be result in a period of ineligibility for institutional care. An example will help to illustrate.

So far in my practice, I have had one situation where I have had used this planning tool. A niece had been caring for her aunt, in the niece's family home. The aunt had approximately $200,000 over and above the Medicaid resource level. The value of the niece's home is approximately $600,000. The aunt is 86 years old and so a life estate for her would be worth approximately 34 percent of the home. The percentage ownership is based on life estate tables. The older a person, the less their interest. The aunt turned over $200,000 to the niece and, in return, the niece added the aunt's name on her deed as a life estate owner. Transfer was made in February 2007 and it was made very clear to the niece that the aunt must reside in the home for 12 months. There will be no credit for staying in the home for a portion of the 12 months. In order for the transfer of assets to be considered as compensation for the life estate, the life estate owner must actually reside in the home for a full 12 months and nothing less.

Recently, the niece called to tell me that her aunt, who has dementia, had fallen and was taken to the nursing home. The doctors were recommending that she stay in the nursing home. We are still several months short of a full 12 months of residence for the aunt. The niece misunderstood, thinking that if the aunt entered the nursing home now, three months short of the full 12 months, that she would only have to pay for three months and then Medicaid would take over. I reaffirmed with her that that was not the case. If her aunt does not remain the full 12 months in the home, then all of the $200,000 paid out will be considered a gift and would have to be considered available to the aunt for Medicaid purposes. I emphasized that it is critical that when the aunt's rehabilitation in the nursing home is over, she return to the niece's home. I would argue that rehabilitation in the nursing home is a temporary absence and that the home is still the actual residence of the aunt. However, if she were not to return home, clearly, our plan would not work. The niece understands and is determined to bring her aunt home as soon as possible.

The benefit of exchanging money for a life estate has now been codified under the new law. However, the requirements are specific. There is no leeway and there is no partial credit. However, in the right circumstances, the purchase of a life estate can be a good way to protect part or all of a Medicaid applicant's available assets.