Life-Estate Deeds can be an excellent tool for Medicaid planning, probate avoidance and tax efficiency, but there are potential problems to look out for. Knowing the implications and risks of a life estate is essential in determining whether it is appropriate for your situation.
In a life estate, two or more people each have an ownership interest in a property, but for different periods of time. The person holding the life estate — the life tenant — possesses the property during his or her life. The other owner — the remainderman — has a current ownership interest but cannot take possession until the death of the life estate holder. The life tenant has full control of the property during his or her lifetime and has the legal responsibility to maintain the property as well as the right to use it, rent it out, and make improvements to it.
Life estates are excellent planning techniques in many circumstances. They permit parents to pass ownership in 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.
However, there are potential issues that may arise with life estates and it’s important to fully understand the following risks:
- 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. Or the grantor could reserve the power to sell the property during his or her lifetime, but then this power brings the property back into your estate to be counted as an asset for Medicaid purposes, which makes it no better than a Beneficiary Deed.
- One way to avoid the problem of selling the property is to name a trustee to manage the property for the remainderman with the power to sell. The grantor could name a trusted person who would agree to sell the property without having to get the consent of all the remaindermen.
- Another safeguard or tool to bring some leverage to avoid possible problems in the future is for the grantor to reserve a limited power of appointment by deed or will to change who the remainderman will be in the future except back to the grantor. This is a mechanism that permits the life tenants to change who ultimately receives the property by directing its disposition by deed or in the grantor’s will. It doesn’t allow the life tenant to sell the property, but it does give the life tenant more bargaining power with the remaindermen.
- 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.
- Once a remainderman is named on the deed to your house, he or she has an interest in the home and his or her 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 he or she files for bankruptcy. If your child gets a divorce, his or her 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 or delay 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.
As with most planning tools, a life estate can be very useful 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 important to talk to a lawyer who knows about this in-depth.