Did you know that transferring your residence subject to a life estate can have potential tax benefits for Lockheed Martin 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 Lockheed Martin 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 Lockheed Martin 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 Lockheed Martin 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 Lockheed Martin 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 Lockheed Martin 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 Lockheed Martin 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 Lockheed Martin 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 Lockheed Martin 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 Lockheed Martin determine the monthly pension benefit for employees nearing retirement, and what factors should employees consider when planning their retirement based on this calculation? Specifically, how do the concepts of "Final Average Pay" and "Credited Years of Service" interact in the pension calculation under Lockheed Martin’s retirement plan?
Lockheed Martin Pension Calculation: Lockheed Martin calculates monthly pension benefits using the "Final Average Pay" (FAP) and "Credited Years of Service" (CYS). The FAP is determined by averaging the three highest annual compensations prior to 2016, while CYS counts the years from employment start to December 31, 2019, when the pension was frozen. The benefit per year of service is calculated based on whether the FAP is less than or exceeds the Social Security Covered Compensation, with specific formulas applied for each scenario. These calculations directly affect the monthly pension benefit, which may also be reduced if retirement commences before a certain age due to early retirement penalties.
Given the recent changes in Lockheed Martin's pension policy, what implications could this have for employees who are planning to retire in the near future? How should these employees navigate their expectations regarding retirement income given that the pension has been frozen since 2020?
Implications of Pension Freeze: Since Lockheed Martin froze its pension plan in 2020, no future earnings or years of service will increase pension benefits. This freeze shifts the emphasis towards maximizing contributions to 401(k) plans, where Lockheed Martin increased its maximum contribution to 10% for non-represented employees. Employees planning for imminent retirement should recalibrate their financial planning to account for this change, prioritizing 401(k) growth and other retirement savings vehicles to compensate for the pension freeze.
What options does Lockheed Martin provide for employees regarding healthcare insurance as they approach retirement age? How do these options compare in terms of coverage and cost, particularly for those who will transition to Medicare upon reaching age 65?
Healthcare Options Near Retirement: As Lockheed Martin employees approach retirement, they can choose from several health insurance options. Before Medicare eligibility, they may use COBRA, a Lockheed Martin retiree plan, or the ACA's private marketplace. Post-65, they transition to Medicare, with the possibility of additional coverage through Medicare Advantage or Medigap plans. Lockheed Martin supports this transition with a Health Reimbursement Arrangement, providing an annual credit to help cover medical expenses.
Understanding the complex nature of Lockheed Martin's pension and retirement benefits, what resources are available to employees to help them navigate their choices regarding pension claiming options? In what ways can the insights from these resources aid employees in making informed decisions about their financial future?
Resources for Navigating Retirement Benefits: Lockheed Martin employees have access to resources like the LM Employee Service Center intranet, which includes robust tools such as a pension estimator. This tool allows for modeling different retirement scenarios and understanding the impacts of various pension claiming options. Additional support is provided through HR consultations and detailed plan descriptions to ensure employees make informed decisions about their retirement strategies.
For employees with varying years of service at Lockheed Martin, how can their employment history impact their pension benefits? What strategies should individuals explore to maximize their benefits given the different legacy systems that might influence their retirement payout?
Impact of Employment History on Pension Benefits: The length and nature of an employee’s service at Lockheed Martin significantly influence pension calculations. Historical changes in pension policies, particularly the transition points of the pension freeze, play critical roles in determining the final pension benefits. Employees must consider their entire career timeline, including any represented or non-represented periods, to understand and maximize their eligible pension benefits fully.
How does the Lockheed Martin retirement plan ensure that benefits are preserved for spouses or dependents after an employee's passing? How do different claiming options affect the long-term financial security of the employee's family post-retirement?
Benefit Preservation for Dependents: Lockheed Martin's pension plan includes options that consider the welfare of spouses or dependents after an employee's passing. Options like "Joint and Survivor" ensure ongoing benefits for surviving spouses, while choices like "Life with X-Year guarantee" provide continued payments for a defined period after the employee’s death. Understanding these options helps secure long-term financial stability for beneficiaries.
What steps can Lockheed Martin employees take to prepare financially for retirement, especially if they have outstanding loans or financial obligations? How crucial is it for employees to understand the conditions under which these loans must be settled before retirement?
Financial Preparation for Retirement: Employees approaching retirement should focus on clearing any outstanding loans and maximizing their contributions to tax-advantaged accounts like 401(k)s and Health Savings Accounts (HSAs). These steps are crucial for ensuring a smooth financial transition to retirement, minimizing potential tax impacts, and maximizing available retirement income streams.
With the evolution of Lockheed Martin's retirement initiatives, particularly the shift toward higher 401(k) contributions, how should employees balance contributions to their 401(k) with their overall retirement savings strategy? What factors should they consider in optimizing their investment choices post-retirement?
Balancing 401(k) Contributions: With the pension freeze, Lockheed Martin employees should increasingly rely on 401(k) plans, where the company has increased its contribution cap. Employees must balance these contributions with other savings strategies and consider their investment choices carefully to ensure a robust retirement fund that can support their post-retirement life.
How does Lockheed Martin's approach to retirement planning include the management of health savings accounts (HSAs) for retirees? What are the tax advantages of HSAs, and how can employees effectively utilize this resource when planning for healthcare expenses in retirement?
Management of HSAs for Retirees: Lockheed Martin encourages maximizing contributions to Health Savings Accounts (HSAs), which offer significant tax advantages. These accounts not only provide funds for current medical expenses but can also be used tax-free for healthcare costs in retirement, making them a critical component of retirement health expense planning.
What is the best way for employees to contact Lockheed Martin regarding specifics or questions about their retirement benefits? What channels of communication are available, and how can they access the most current and relevant information regarding their retirement planning? These questions aim to encourage thoughtful consideration and discussion about retirement planning within Lockheed Martin, addressing various aspects of the company's benefits while promoting engagement with internal resources.
Contacting Lockheed Martin for Retirement Benefit Queries: Employees should direct specific inquiries about their retirement benefits to Lockheed Martin's HR department or consult the benefits Summary Plan Descriptions available through company resources. These channels ensure employees receive accurate and comprehensive information tailored to their individual circumstances.