Life estates can be an excellent tool for Medicaid planning, probate avoidance, and tax efficiency, but there are potential problems and risks to understand before creating one. Is a life estate right for you?
The Benefits of a Life Estate
In a life estate, two or more people have an ownership interest in a property, but for different periods. The person holding the life estate — the life tenant — possesses the property during their life. The other owner — the remainderman — has a current ownership interest but can’t take possession until the death of the life estate holder. The life tenant has complete control of the property during their lifetime and has the legal responsibility to maintain the property and the right to use it, rent it out, and improve it.
Life estates are excellent planning techniques in many circumstances. They permit parents to pass ownership of their homes to their children while retaining absolute possession of the property during their lives. By executing a life estate deed, the property avoids probate at the parents’ deaths, is protected from a Medicaid lien, and receives a step-up in tax basis.
Potential Issues and Risks
There are potential issues that may arise with life estates, and it’s essential to understand the following risks fully:
- As a life tenant, you may not easily sell or mortgage property with a life estate interest. The remaindermen must all agree if you decide to sell or borrow against the property. One thing that can help is the testamentary power of appointment in the deed. This tool permits the life tenants to change who ultimately receives the property by directing its disposition in their wills. It won’t allow the life tenant to sell the property, but it does give the life tenant more bargaining power with the remaindermen. Another option is a nominee realty trust. This type of trust permits one or more children to act as a trustee for all the children and provides that they must follow the direction of most beneficiaries. So, if there are four children and one child objects to the sale or mortgage of the property, but the other three are on board, the majority can direct the trustee to sign the papers necessary to facilitate the sale or loan.
- If the property is sold, the remaindermen are entitled to a share of the proceeds equal to what their interest is determined to be at that time.
- It is not as easy to remove or change a name once it is on a deed to real estate as it is to change the beneficiary on a life insurance policy or bank account.
- Once a remainderman is named on the deed to your house, they are interested in the home, and their legal problems could become yours. For example, if your child, who is a remainderman, is sued or owes taxes, a lien could be filed against your home. Your child’s interest in the home is not protected if they file for bankruptcy. If your child gets divorced, their spouse could claim all or part of your child’s interest in your home. Should your child die before you do, the child’s estate would have to go through probate unless at least one other remainderman was listed as a joint tenant. However, while these claims may be made against the property, no one can kick you out of it during your life.
- Giving away an interest in property could disqualify you from receiving assistance from Medicaid should you require long-term care within five years of the transfer. In addition, if you and the remaindermen were to sell the property while you were in a nursing home, the state could have a claim against your share of the proceeds for payments it has made on your behalf, but the share of the proceeds allocated to your children would be protected.
For more information, check out more articles regarding life estates:
- Can I Transfer My Interest in a House in Which My Parents Own a Life Estate Without Affecting Their Medicaid?
- Can My Mother Buy a Life Estate in a New Home, and How Will the Purchase Affect Capital Gains?
Like most planning tools, a life estate can be beneficial with valuable benefits, but it is not for everyone. In many cases, the potential problems outweigh the benefits. As the law in this area is complex, it’s essential to talk to a lawyer who knows about this in-depth. The easiest way to know if a life estate is right for your situation is to find an attorney near you.
This article is for informational purposes only and shall not be construed as legal advice. No attorney-client relationship between the reader and Brennan & Rogers, PLLC, or its attorneys is intended. This article should not be used as a substitute for legal advice. Laws may vary from state to state, and the educational materials found in this article may not apply in all jurisdictions. Brennan & Rogers, PLLC | 279 York Street, York, ME 03909 | 207-361-4680 | email@example.com