An End To the Uncertainty — Your Life Estate (and other non-probate assets) are safe from Medicaid

May 31, 2012 | Trusts & Estates

Retained life estates are once again protected from Medicaid claims.  A common elder law technique is for an individual to transfer the ownership of their house to their children, while keeping the right to live in the house for their life.  This is called a “retained life estate”.  At death, the house would immediately transfer to the children, without the need for probate.

On March 30, 2012, the New York State legislature voted to repeal the law that would have expanded Medicaid estate recovery to non-probate assets.  The repeal also means that pre-existing estate plans are safe from Medicaid claims (provided they are outside the penalty transfer and look-back periods).  In 2011, NYS passed an expanded Medicaid estate recovery act (the “Act”), and proposed regulations were later issued.  The Act defined which assets in your estate (after you die) the government could collect from to recover certain costs of Medicaid paid on your behalf during life.  Previously, non-probate assets were safe.  However, as a result of the Act, the following assets, among others, became fair game: joint accounts, retained life estates and interests in trusts.

If the Act and the proposed regulations had been successful, it meant that if you passed away anytime on or after July 1, 2012, that your retained life estate, retirement accounts and joint bank and brokerage accounts would have been subjected to Medicaid claims, regardless of how long ago those assets were created.  This would have undone years of estate planning.  Thanks to the efforts of the Elder Law, Trusts and Estates Law and Real Property Law Sections of the New York State Bar Association (“NYSBA”), the Act and its proposed regulations were repealed.  The NYSBA, among other things argued that the regulation’s retroactive application was unconstitutional and conflicted with NYS law.  They also argued that under NYS law, certain non-probate assets are not subject to claims of creditors.

The Act would have also eliminated “spousal refusal” for Medicaid purposes.  Commonly, a healthy spouse (or a community spouse) refuses to support and contribute to the care of their sick spouse.  This enables the sick spouse to qualify for Medicaid.  However, the community spouse keeps the assets for use during their lifetime.  This allows the healthy spouse to afford to live in the home, without also paying for the cost of nursing care, which may have otherwise impoverished the community spouse.

The repeal of the Act means that, at least for the time being, spousal refusal remains in tact, and if proper planning is timely completed that life estates and other non-probate assets can pass to your family members free from Medicaid claims.

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