Life estates can prove to be an excellent tool for Medicaid planning. In addition, you may consider a life estate to avoid probate or to improve your tax efficiency. However, keep in mind that there are potential problems and risks to understand before creating a life estate. Continue reading to determine whether a life estate is right for you.
What Is a Life Estate?
In a life estate, two or more people each 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. Yet they cannot take possession until the death of the life estate holder.
Benefits of a Life Estate Deed
The life tenant has full control of the property during their lifetime. They also have the legal responsibility to maintain the property and the right to use it, rent it out, and make improvements to it.
Life estates are excellent planning techniques in many circumstances. For example, 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 would avoid probate at the parents' deaths. A life estate deed also protects the property from a Medicaid lien and receives a step-up in tax basis.
Potential Issues and Risks
However, be sure you have a handle on the myriad of potential issues that may arise with life estates. The following are examples of the possible risks or downsides you should understand:
Selling or Mortgaging the Property
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 you want to sell or borrow against the property.
One thing that can help is a 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 a majority of the 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.
Removing a Remainderman
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 have an interest 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.
Protecting the Remaindermen
Again, you may wish to make your child a remainderman in your life estate deed. However, be sure to consider the following:
- Their interest in the home is not protected if they file for bankruptcy.
- If your child gets a divorce, 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.
Note that while these claims may be made against the property, no one can kick you out of it during your life.
Qualifying for Medicaid
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. (Learn more about how Medicaid's five-year lookback period works.)
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. (The share of the proceeds allocated to your children would be protected.)
Consult With an Estate Planning Attorney
As with most planning tools, a life estate can prove useful and have several valuable benefits, but it might not be right for everyone. In many cases, the potential problems can outweigh the benefits. As the law in this area is complex, it’s important to talk to a lawyer who has extensive knowledge in this area. The easiest way to be sure a life estate is right for your unique situation is to find a qualified attorney near you.
For more information on life estates, check out more articles:
- Lady Bird Deeds: A Different Kind of Life Estate
- 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?
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