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Estate tax changes for 2010 are creating problems for Medicaid planning to help pay for nursing home costs and VA benefits planning to help pay for at-home, assisted living, and other long-term care costs.

Life Care Planning, Estate Protection, Disability,
VA & Medicaid Assistance Lawyers

Medicaid Planning, Life Estates and Tax Basis Rules

Estate tax changes for 2010 are playing havoc with traditional estate tax planning. (At the risk of over-simplifying, those who have more than one million in assets).  The 2010 tax law changes in Internal Revenue Code §1022, however, also are creating problems for those who are concerned with qualifying for Medicaid and VA benefits to help pay for nursing home and other long-term care costs.

For those who die in 2010 there is no automatic step up in tax basis on inherited real estate and other assets.  Instead, a decedent's estate can add $1.3 million (for a single person) or up to $4.3 million (for a married person) to the basis of inherited assets.

Frequently, in the past, individuals who wanted to transfer their home for Medicaid planning purposes did so in one of six ways: (1) joint tenancy with right of survivorship; (2) a reserved power of appointment in a deed; (3) an irrevocable income-only trust, which often includes a reserved power of appointment; (4) a reserved life estate; (5) a use-and-occupancy agreement; or (6) an informal understanding.

After January 1, 2010, to qualify for the step-up in basis, an asset must be owned under Section 1022(d) and acquired under Section 1022(e), so each type of transfer must be analyzed.

Internal Revenue Code § 1022 (d)(1)(B)(i) allows at least a partial step-up in tax basis for some joint tenancies.  However, subsection (iii) of § (d)(1)(B) denies the step-up for a reserved power of appointment, presumably only in a deed.

Code § 1022(e)(2)(B) allows the step-up for some irrevocable trusts, including a power to alter or terminate the trust.  This would seem to include a reserved power of appointment in an irrevocable trust.

The reader is cautioned to talk with an experienced estate planning attorney because a transfer with a reserved life estate may have a different result for deaths in 2010.  Indeed, knowledgeable attorneys have questioned whether a life estate is entitled to a step-up in basis after January 1, 2010. Several blog commentators have written that a life estate is not eligible for the step-up in basis, but many of them seem to be echoing each other and not setting forth their analysis.

Section 1022(e)(3) seems to include a reserved life estate but not a use-and-occupancy agreement or informal understanding.  The language in (e)(3) includes “property passing from the decedent by reason of death to the extent that such property passed without consideration,” and where the property passes to the remainder-persons upon the life tenant’s death, that description could include a reserved life estate.

The National Association of Elder Law Attorneys is currently seeking guidance from the IRS as to whether the tax basis under IRC § 1022 can be allocated to property transferred as a result of a life estate.