Question:

The attorney I retained has already cost me $2,500 ($1,000 retainer fee + additional charges) for emails, mostly, and a 1/2 hour conference call). I am 76, live alone, have 2 sons, own home (mortgage still) in Massachusetts, and have group LTC policy. He recommends an irrevocable trust with life estate but my bank doesn’t approve that kind of trust. My sons think maybe a life estate provides sufficient protection, given my LTC policy. We’ve already spent so much money and a life estate would be much cheaper than an irrevocable trust. Does it still provide enough protection pre- and post-death? Also, can I do the life estate myself without using a lawyer to complete documents?

Response:

I’m sorry to hear that you have invested so much and still don’t have a clear path on how to proceed. It sounds like your only significant asset is your home. Massachusetts is unique in that if you have a qualifying long-term care insurance policy, your home would not be subject to estate recovery at your death. So if your policy qualifies (which most do), you do not have to do anything, other than maintain your policy, to protect your home from Medicaid (called MassHealth in Massachusetts) estate recovery.

The issue, however, is whether you might want to sell the house. If you did that, the proceeds would not be protected by this provision. Irrevocable trusts and life estates both have their advantages and disadvantages in terms of protecting the house. They both work in terms of protecting the house from Medicaid estate recovery at your death.  Life estates are certainly simpler and, as you say, less costly to set up, but they protect less of the proceeds of a sale during your life. If you were to sell the house, the proceeds would be split between you as the so-called “life tenant” and your sons as the remaindermen. In contrast, if the house were sold and it was held by an irrevocable trust, all of the proceeds would remain in the trust.

But that also means a trade off. The proceeds would all be protected if the house were in trust, but you would not have access to them if you needed them. For the trust to work for Medicaid planning, it can’t permit distributions to you. (It could make distributions to your sons and they could then give you the money or use it to pay for items or services on your behalf, but they would not be required to do so.)

To make matters even more complicated, if you were to sell the house the capital gains treatment for life estates and trusts are different. With a trust, you can use your $250,000 exclusion against the entire proceeds. With a life estate, you can only use it for the share going to you. Your sons would have to pay the full capital gains tax for the share going to them.

But the bottom line is that if you’re sure you won’t sell the house, a life estate is simpler, less expensive, and just as good as an irrevocable trust. If you might sell the house, then an irrevocable trust would better protect the proceeds. But none of this is simple—which is probably why you’ve had so many emails going back and forth with your attorney. For instance, would you ever need to access more equity in the house to pay for your care or for living expenses? If so, you may not want to take either step.

In terms of a bank calling in a mortgage loan if you placed the house in an irrevocable trust, I’ve never actually seen a bank do this as long as you continue making the payments on the mortgage. However, we’ve never seen mortgage rates increase as much as they have over the past year. Banks might be more incentivized now than in the past to take a closer look at existing loans.

Related Articles:

What Does Medicaid Do If We Sell a House in a Life Estate?

Medicaid and Trusts

How Can I Protect My Real Estate from Future Medicaid Claims?

2 Ways to Protect Your House if You Need Medicaid Coverage of Long-Term Care

Advance Medicaid Planning