Protecting Assets from Creditors

 Life Estates and Medicaid

In 2006, Minnesota rewrote probate law that has been the law of the land since the middle ages. This
change provided a way for the State to attach non-probate assets. No other creditor can attach assets
outside of probate. The State also came up with a way to determine the life expectancy of a deceased
person. Finally, the State changed the look back period and the application of the rules of ineligibility.
As a result, Medicaid and life estate planning could be one of the most complex areas of planning.

Let’s start with the basics. If an individual is destitute, the State of Minnesota along with Federal
contributions will pay the costs of a nursing home. Many families wanted to protect assets such as the
family home. Therefore, many advisors and attorneys discussed the benefit life estates to protect assets from creditors such as a nursing home. The protection was derived as the decedent had no ownership property at the moment of death. The life estate passed to the remaindermen outside of probate at the instant of death. In other words, at the moment of death, the property belonged to the remaindermen. The State could not legally attach the assets of the remaindermen for the deceased persons costs of a nursing home.

Today, the State uses the life expectancy of the deceased person on the day before death for their
calculations. The table adopted by the state provides life expectancies far longer than federal tables.
The result is that a much greater portion of the property can be attached by the state and a greater
portion remaining in the estate of the original owner if the property is sold.

The Pre Feb 2006 rules required a three year look back period from the month of an application for
Medicaid. A “look back” is the State’s review to determine whether an individual transferred assets
to another person for less than fair market value. To be eligible for MN Medicaid prior to the change,
an individual must go three years without giving a gift or transferring assets for less than FMV. When
individuals transfer assets at less than FMV they are subject to a penalty that delays the date they can qualify to receive Medicaid long-term care services. So if a gift was made 2 years prior to application, Medicaid could not pay benefits for up to another year, based on the size of the gift and the average cost of a nursing home “as determined by the Minnesota legislature”. The total transfer was divided by the average nursing home cost to determine the period of ineligibility beginning with the month of the transfer.

Today, all transfers for less than value in the prior five years will eliminate Medicaid benefit. Like before, the total gift is divided by the average cost of a nursing home to determine the number of months of ineligibility. However, rather than starting on the month the gift is made; the countdown begins when an application for Medicaid is made. The penalty could last for decades if the transfer is large enough.

A gift of a life estate registration is a transfer for less than value. It each transfer after the new laws
were signed will be subject to the rules that were established after February 2006.

Minnesota adopted a new TOD for real estate. This is a way to avoid probate without the complexities
of a life estate. In my opinion, few families will utilize a life estate because:

• The life estate will not protect assets from creditors
• The new TOD for real estate will avoid probate
• The new TOD does not give rights to heirs
• The owner can sell the property without signatures of heirs
• A gift tax form is not required for the TOD and more

More advance planning is required to protect assets from the costs of creditors, including the State of
Minnesota. However, great care must be exercised by the family as well as the advisor.