Did you know that transferring your residence subject to a life estate can have potential tax benefits for Aetna employees and retirees? When the property is sold during your life, your share of the proceeds is determined based on the value of your life estate. This means that you may be able to exclude a portion of the capital gain from taxation if you meet the requirements. By utilizing this strategy, you can potentially minimize the tax burden when selling your home and maximize the financial benefits of your residence transfer.
Introduction
Our Aetna clients frequently face the challenge of preserving their residences while also qualifying for Medicare. A transfer subject to a life estate can be used to preserve your residence and increase your Medicaid eligibility. You transfer the 'remainder interest' in your home to your offspring (or other beneficiaries) and retain a 'life estate' for yourself using this estate-planning device. As a matter of convenience, you deed the property to the remainder beneficiaries and include language in the deed to retain your life estate. The life estate grants you the legal right to reside in the residence for the remainder of your life. As the 'life tenant,' you remain responsible for paying all ordinary and necessary property maintenance costs, such as property taxes, insurance, utilities, and routine repairs. The home transfers to the remainder beneficiaries upon your passing.
The benefit of this arrangement is that you can remove a significant portion of your home's value from your financial profile for Medicaid eligibility purposes and abbreviate any period of ineligibility while retaining your right to reside in the home. Many of our Aetna customers have found success with this potent retirement tool.
How Does It Work?
Remainder Interest Not Countable As Available Asset for Medicaid Eligibility Purposes
In order to qualify for Medicaid, both your income and the value of your other assets must fall below state-specific limits. In determining your Medicaid eligibility, a state may only consider the income and resources legally available to pay for your medical expenses.
A transfer subject to life estate can help you qualify for Medicaid by rendering your home's remainder interest unavailable to you (and, therefore, to the state) once any period of ineligibility expires. Nonetheless, the life estate is considered an available asset. Medicaid employs a 'Life Estate and Remainder Table' to determine the value of your life estate based on your life expectancy and the value of your residence. In addition, because you retain an interest in the property, any period of ineligibility will be shorter than if you had completely conveyed the property.
Caution: if you (or, if married, both you and your spouse) enter a nursing home, the life estate still grants you the right to reside in the home for the remainder of your life. If you are unable to return home, however, the residence could (and perhaps must) be rented, and the net rental income would be applied to your nursing home expenses.
Preserves Home for Your Beneficiaries
In addition to helping, you qualify for Medicaid; a life estate may also help you preserve the home for your heirs. The home transfers directly to the remainder beneficiaries upon death; it is not part of the decedent's probate estate, and states cannot typically seize it under estate recovery theories. Numerous Aetna clients have deemed this to be desirable.
Caution: Some states have adopted a broader definition of an estate that includes non-probate assets in which you have an ownership interest at the time of your demise. These states place a lien on your home to collect the value of your life estate at the time of your demise.
Shortens Any Period of Ineligibility
Despite the fact that the residence transfer subject is a powerful instrument for Aetna employees and retirees, there is an ineligibility period. As with any transfer of assets for less than fair market value, a gift of the remainder interest in your property can result in a waiting period or period of ineligibility prior to Medicaid eligibility. When you register for Medicaid, the state has the right to review your (and your spouse's) finances for a period of months preceding the date of your application. The look-back period for transfers made on or after February 8, 2006 is sixty months. Therefore, if you give away a house (or a remainder interest in the house) within 60 months of the date you register for Medicaid, you may be ineligible for Medicaid for a set number of months, determined by a state-mandated formula. This formula can be described as the value of the remainder interest (from actuarial tables) divided by the average monthly cost of nursing facilities in your area, with the quotient representing the number of months for which you will be ineligible for Medicaid benefits. Because only the valuation of the remainder interest is factored into the calculation, the period of ineligibility will be shorter than if the entire property had been transferred.
Strengths
Preserves Your Right to Live In the Property for Life
Numerous Aetna employees and retirees place a high priority on preserving their legal right to reside in their own residence. If you give your home to your offspring without reserving a life estate, you forfeit the right to continue living there. Consequently, if your children divorce or owe money to creditors, the house will be sold and you will be left without a place to reside. By contrast, reserving a life estate preserves your right to reside in the home. Even if your child sells his or her remainder interest in the property, the buyer cannot assume possession of the property until your demise.
Avoids Probate
The property transfers directly and automatically to the remainder beneficiaries upon your death, thereby avoiding the expense and delay of probate.
Preserves Assets for Your Loved Ones (In Some States)
Many states seek reimbursement from your estate for Medicaid benefits they paid on your behalf after your demise. In certain jurisdictions, 'estate' refers exclusively to your probate estate. Since any assets transferred pursuant to a life estate arrangement would be removed from your probate estate, these states would be unable to seek title to those assets. Therefore, the assets would be preserved for your family. This eliminates a major concern of many Aetna employees and retirees, namely that the state will seize the assets they wish to pass on.
Helps You Qualify for Medicaid
A transfer subject to a life estate helps you qualify for Medicaid by rendering your remainder interest in your home unavailable to you (and, therefore, to the state) for Medicaid eligibility purposes once any period of ineligibility expires. Additionally, any period of ineligibility is reduced because the value of your retained interest is excluded from the calculation.
Minimizes Gift Tax on the Transfer
If you deed your property and retain a life estate, your gift of the remainder interest will be complete. The value of the gift is the home's fair market value at the time of the gift, less the value of your life estate. However, you may not actually be required to pay federal gift tax if it can be mitigated by your exclusion amount.
Provides Your Children with a Stepped-Up Basis
The tax benefits that transferring a residence to a life estate can bring to a beneficiary in the future is an additional factor that is frequently considered by Aetna employees and retirees. Your offspring (or whoever you name as remainder beneficiaries) are treated as if they inherited your property for income tax purposes. In other words, your children may use the property's fair market value on the date of your death as the premise for calculating their capital gain on a subsequent sale. This type of basis is known as a stepped-up basis.
Assume John paid $70,000 for his residence twenty-five years ago. He reserved a life estate in the property and granted Mary the remainder interest. The value of John's property upon his demise is $250,000. There will be no capital gain if Mary sells the property for $250,000, as she will have a 'stepped-up' basis of $250,000. Mary's basis would be $70,000 if John had merely given the house to her without reserving a life estate. She would report a $180,000 capital gain.
Tradeoffs
Loss of Control Over Asset
Your donation of the remainder interest cannot be revoked. This means that once the property has been transferred, you no longer have legal control over its ultimate disposition.
Value of Life Estate May Be Subject to Medicaid Estate Recovery in Some States
After your death, your state may seek reimbursement from your estate. For Medicaid purposes, the word 'estate' has traditionally been interpreted by the majority of states as your probate estate; that is, it has been interpreted by the majority of states as excluding assets that pass by beneficiary designation or by operation of law. However, some jurisdictions have adopted a definition of estate that includes non-probate assets as well. These states may exercise their authority to collect the value of your life estate just prior to your passing.
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Sale of the Home During Your Lifetime May Be Problematic
Your percentage of the sale proceeds may be considered a 'available resource' for Medicaid eligibility purposes, disqualifying you from benefits.
How to Do It
Gather Your Medicaid Eligibility Information Before Consulting An Attorney or Other Financial Professional
- Prepare a list of all your assets (and those of your spouse) that includes the manner in which title is held, the tax basis, and the purchase price.
- Prepare an inventory of all of your (and your spouse's) sources of income.
- Indicate whether your resources are exempt, non-exempt, or inaccessible for Medicaid purposes.
- Compile an inventory of all assets transferred within the past sixty months, whether by gift, trust, or other means. Indicate the transfer date, recipient, purpose, and consideration (what you received in exchange).
Consult a Medicaid Law Attorney
Many Aetna employees and retirees find it difficult to comprehend Medicaid laws on their own. Medicaid laws have endured a number of changes in recent years. Given that certain planning vehicles have been eliminated and the majority of rules have been tightened, it is reasonable to anticipate that additional changes will occur in the coming years. Consultation with an attorney experienced in Medicaid planning is essential. A lawyer will explain your options, offer suggestions, and ensure that establishing a life estate is in your best interest.
Tax Considerations
Income Tax
Generally, there should be no income tax consequences of transferring your residence subject to a life estate. However, if the property generates rental income (e.g., a two-family house), the life tenant will continue to be responsible for reporting the rental income and expenses on Schedule E of his or her federal income tax return.
Gift Tax
The transfer of your residence pursuant to a life estate should generally not have any income tax consequences. Nonetheless, if the property generates rental income (e.g., a two-family home), the life tenant remains responsible for reporting rental income and expenses on Schedule E of his or her federal income tax return.
Estate Tax
For estate tax purposes, the full FMV of the residence will be included in your gross estate if you have a life estate.
Questions & Answers
When A Person Has A Life Estate In A Property, How Is His or Her Share of Proceeds Calculated When The Property Is Sold During His or Her Life?
How Is a Person's Share of Proceeds Calculated When the Property Is Sold During His or Her Life if He or She Has a Life Estate?
Three years ago, a sixty-year-old widow transferred her home to her son, subject to a life estate. She has decided to move in with her son, and they intend to sell the home together. She purchased the residence for $60,000 many years ago, and they now have a suitor willing to pay $200,000 for it. Assuming her life estate is worth approximately 74% and her son's remainder interest is worth 26%, the woman's share of the proceeds would be 74% of $200,000, or $148,000. Her son's share of $200,000 would amount to $52,000, or 26%.
If you sell your primary residence for a profit, you may be able to exclude all or a portion of the capital gain from taxation. Regardless of your age, if you satisfy the requirements, you can exclude up to $250,000 (or up to $500,000 for married couples filing jointly) of your capital gain. You can generally exclude the gain only if you owned and occupied the property as your primary residence for at least two of the five years preceding the sale (the two years do not have to be consecutive). Generally, a person or either spouse in a married couple can only claim this exemption once every two years. However, you may be eligible for a partial exemption even if you do not meet these requirements.
When you transfer a partial interest in your primary residence (such as a life estate), you are subject to special capital gain exclusion rules. Assuming all requirements are met, you may exclude gain from the sale or exchange of a partial interest in your principal residence if the partial interest includes a dwelling unit interest. However, only one $250,000 ($500,000 for certain joint returns) maximum limitation amount applies to the combined sales or exchanges of partial interests. In other words, partial interests in a single principal residence are regarded as a single sale or exchange. Refer to IRS Publication 523, Selling Your Home, for more information.
Conclusion
Imagine you're preparing a delicious homemade pie for your family. As the head chef, you want to ensure that everyone gets a fair slice while also saving some for yourself. In a similar way, transferring your residence subject to a life estate is like dividing the pie. You pass on the ownership of the pie to your children (or other beneficiaries) while reserving a slice for yourself. This not only allows you to continue enjoying the comfort of your home but also helps you qualify for Medicaid benefits by reducing the value of your assets. It's a smart and strategic way to secure your residence and safeguard your future while still savoring a piece of the pie.
How does Aetna Inc.'s frozen pension plan affect employees' eligibility for benefits, and what specific criteria must current employees meet to qualify for any benefits from the Retirement Plan for Employees of Aetna Inc.?
Eligibility for Benefits: Aetna Inc.'s pension plan has been frozen since January 1, 2011, meaning no new pension credits are accruing. Employees who were participants before this date remain eligible for benefits but cannot accrue additional pension credits. To qualify for benefits, participants need to have been vested, which generally occurs after three years of service(PensionSPD).
In what ways can employees at Aetna Inc. transition their pension benefits if they leave the company, and what implications does this have for their tax liabilities and retirement planning?
Transitioning Pension Benefits: If employees leave Aetna, they can opt for a lump-sum distribution or an annuity. Employees can roll over their lump-sum payments into an IRA or other tax-qualified plans to avoid immediate taxes. However, direct rollovers must follow the tax-qualified plan's rules. If not rolled over, employees are subject to immediate tax and potential penalties(PensionSPD).
What steps should an Aetna Inc. employee take if they become disabled and wish to continue receiving pension benefits, and how does the company's policy on disability impact their future retirement options?
Disability and Pension Benefits: Employees who become totally disabled and qualify for long-term disability can continue participating in the pension plan until their disability benefits cease or employment is terminated. No additional pension benefits accrue after December 31, 2010, but participation continues under the plan until employment formally ends(PensionSPD).
Can you explain the implications of the plan amendment rights that Aetna Inc. retains, particularly concerning any potential changes in the pension benefits and what this could mean for employee planning?
Plan Amendment Rights: Aetna reserves the right to amend or terminate the pension plan at any time. If the plan is terminated, participants will still receive benefits accrued up to the date of termination, protected by ERISA. Any future changes could impact employees' planning and retirement options(PensionSPD).
How does the IRS's annual contribution limits for pension plans in 2024 interact with the provisions of the Retirement Plan for Employees of Aetna Inc., and what considerations should employees keep in mind when planning their retirement contributions?
IRS Contribution Limits: The IRS sets annual contribution limits for pension plans, including defined benefit plans. In 2024, employees should ensure that their pension contributions and tax planning strategies align with these limits and the provisions of Aetna's pension plan(PensionSPD).
What are the options available to Aetna Inc. employees regarding pension benefit withdrawal, and how can they strategically choose between a lump-sum distribution versus an annuity option?
Withdrawal Options: Aetna employees can choose between a lump-sum distribution or various annuity options when withdrawing pension benefits. The lump-sum option allows for immediate access to funds, while annuities provide monthly payments over time, offering a more stable income stream(PensionSPD).
How does Aetna Inc. ensure compliance with ERISA regulations concerning the rights of employees in the retirement plan, and what resources are available for employees to understand their rights and claims procedures?
ERISA Compliance: Aetna complies with ERISA regulations, ensuring employees' rights are protected. Resources are available through the Plan Administrator and myHR, providing information on claims procedures, plan rights, and how to file appeals if necessary(PensionSPD).
What documentation should employees of Aetna Inc. be aware of when applying for their pension benefits, and how can they ensure that they maximize their benefits based on their years of service?
Documentation for Benefits: Employees should retain service records and review their benefit statements to ensure they receive the maximum pension benefits. They can request additional documents and assistance through myHR to verify their years of service and other relevant criteria(PensionSPD).
How do changes in interest rates throughout the years affect the annuity payments that employees at Aetna Inc. might receive upon retirement, and what strategies can they consider to optimize their retirement income?
Impact of Interest Rates on Annuities: Interest rates significantly affect annuity payments. Higher interest rates increase the monthly annuity amount. Employees should consider the timing of their retirement, especially at the end of the year, when interest rates for the following year are announced(PensionSPD).
If employees want to learn more about their pension options or have inquiries regarding the Retirement Plan for Employees of Aetna Inc., what are the best channels to contact the company, and what specific resources does Aetna provide for assistance?
Contact for Pension Inquiries: Employees can contact myHR at 1-888-MY-HR-CVS (1-888-694-7287), selecting the pension menu option for assistance. Aetna also provides detailed resources through the myHR website, helping employees understand their pension options and benefits(PensionSPD).