How Are Proceeds of Sale of Life Estate Distributed?
My husband’s parents have a life estate….father passed away, mother recently moved to a nursing home. Siblings want to sell house. Is this possible without the life use tenant being penalized under Medicaid (is there a 6-month rule that it can be sold after she’s been in nursing home for 6 months without penalty)? Also, the siblings are requesting reimbursement for any repairs and maintenance they paid toward house. We understood that the Life Tenant is responsible for repairs and maintenance. Does that change if life use goes into nursing home and if so, at what point in time? If repair and maintenance costs are to be reimbursed, is it then divisible by all remainderman?
You have a number of questions. In most states the home of a nursing home resident does not have to be sold. But I’ve never heard of a six-month rule, so perhaps your state does require that it be sold after six months. You’ll have to check with a local Medicaid agency or elder law attorney to learn your state’s specific rules.
Once the property is sold, the proceeds will be divided between your mother-in-law and her children based on her age at the time. The IRS provides tables for allocating the proceeds that are adjusted to the prevailing interest rates at the time of the sale. But some Medicaid agencies use their own tables. For instance, here’s the table used by Nebraska. Under its table, if your mother-in-law was 80 years old when the property was sold, she would receive 44% of the proceeds and the remaindermen 56%. For instance, if the house was sold for $300,000, your mother-in-law would receive $132,000 and your husband and his siblings $168,000.
Again, a local Medicaid office or elder law attorney can advise you on the appropriate table. No matter the table, the older your mother-in-law is old, the greater the portion of the proceeds that will go to her children. They will have to pay taxes on any capital gain. The basis of the property was adjusted upon your father-in-law’s death, which should minimize the gain and the tax. It’s unlikely that your mother-in-law will have to pay any capital gains tax on her share because she can exclude the first $250,000 of gain since the property is her home.
In terms of your mother-in-law reimbursing her children for funds they have advanced to maintain the property, that’s problematic. The burden of proof would be on you to show that the funds were advanced as a loan with a commitment on your mother-in-law to pay the money back. Without that proof, the Medicaid agency is likely to treat any reimbursement as a gift and penalize your mother-in-law with a period of ineligibility for benefits. But different Medicaid agencies require different levels of proof for such reimbursements. Again, I would recommend that your husband and his family consult with a local elder law attorney. They can find one at www.ElderLawAnswers.com.
Finally, assuming reimbursement by your mother-in-law is not possible in your state, your husband and his siblings can equalize things among themselves from their share of the sale proceeds.