Using a Life Estate Deed to Protect Your Home

by Matthew Karr, Esq. on January 14, 2011

As the saying goes, home is where the heart is. Home is also where cherished family moments have been made, where you find comfort from life’s frenetic pace, and it is quite possibly your largest single asset. Obviously the home is worth protecting, but how? One way to protect your home from long term care expenses is through the use of a life estate deed.

Some people assume that they can simply transfer the home to one of their children and it will be protected, however, it is not that simple. As with any transfer of your home, if not done properly there can be serious tax and Medicaid eligibility consequences.

A life estate deed is a deed in which you transfer the future ownership of your home but retain the current ownership, creating both a present interest and a future interest in the property. You, as the present interest holder, have the exclusive right to enjoy and live in the residence until you pass. You are also responsible for paying the ongoing expenses of the property, such as taxes, insurance and maintenance costs. The future interest holder receives the right to own and use the property after you pass. This allows the property to pass to your children or other person whom you wish to have the property as a matter of law without interference from the probate court.

There are several benefits to using a life estate deed. First, you are able to maintain security for yourself in your own home. Your future interest holder cannot move in or kick you out of your home, and even if creditors have a claim against your future interest holder’s interest in the property, it is not subject to partition and cannot be sold absent your consent. You can also retain any tax abatements that may have been available to you prior to the transfer, such as veterans and senior citizens exemptions. The future interest holder may not transfer or sell the property without your signature. However, you will also need the consent of your future interest holder to sell, mortgage, or refinance the property.

Another benefit of life estate deed is that because your home remains an asset of your estate for estate tax purposes, your future interest holder will receive a “step-up in basis” when they receive the real estate. This means that the property they inherit will be valued for tax purposes at the date of your death, not the date of the transfer value or the value that existed when you acquired the property. Because of this they should be able to avoid capital gains taxes when they decide sell the property.

Also, the transfer of the life estate deed triggers the waiting period for Medicaid eligibility. This transfer will start the five year transfer period, after which the property should be protected and Medicaid benefits obtained. If you need nursing home care within five years of signing the life estate deed, you would have to pay privately for your care until the remaining penalty period ended. However, by retaining a life estate the penalty period will be much less than if you had transferred the property outright, since the penalty is based on the value of the transfer.

Another Medicaid planning strategy involves a parent purchasing a life estate in the home of a child. Medicaid allows this technique so long as the parent actually resides in the home for at least a year after the purchase.

There are many considerations to take into account when deciding whether to use a life estate deed as part of your estate plan. Speak with a Massachusetts estate planning attorney to find out if this strategy could work for you.

Related posts:

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  2. Planning for MassHealth (Medicaid) Eligibility
  3. The World’s Fastest-Growing Age Group
  4. Using the Durable Power of Attorney to Effectuate Medicaid Planning
  5. Symptoms, Diagnosis, Treatment of Alzheimer’s Disease – NY Times Health Information

{ 6 comments }

Lucille June 23, 2011 at 8:48 pm

Approx. 10 tens yrs. ago my mother transferred her home to me and my brother & both have a life estate.
First, who is responsible for taxes, bills etc. once my mother passes on?
Second, my brother lives in the house & refuses to sell once she passes. What recourse do I have & what am I responsible for if any? .
I appreciate any advice you could give me.
Thanks

Matthew Karr, Esq. June 23, 2011 at 9:50 pm

Hi Lucille. It sounds like you mother is the one with a life estate and when she passes you and your brother will inherit the property as joint owners. If that is the case, both will be responsible for the costs of the property, like taxes, but you will not have to pay if he decides to make improvements. A joint owner can bring a ‘petition to partition’ in the probate or land court which will force your brother to either buy you out or sell the property and split the profits with you. To avoid this conflict your mother might consider leaving the house in a trust with instuctions that it be sold when she passes. Feel free to call or email if you need any further help.

ELLEN June 26, 2011 at 11:38 pm

Hi Matt, My mom is still alive and owns her home. She has a life estate deed which states ” during the term of my life and then to my children XXX- in equal shares as joint tenants and not tenants in common” Can she sell her home without her childrens approval, or what does it take to remove one child (cost) ? The deed does NOT contain a clause in which it gives the owner the right to sell the property without needing any consent. The house is located in Massachusetts. THANKS

Matthew Karr, Esq. July 6, 2011 at 4:51 pm

Hi and thanks for your comment. Once a life estate has been executed, all parties must consent before one can sell the property. To remove one child she may either have to get the children to allow her to recind the deed and execute a new one or buy out that child’s interest. Please be in touch if I can help you with this matter.

Best,
Matt

Legal Disclaimer: Please note that this answer does not constitute legal advice, and should not be relied on since each situation is fact specific, and it is impossible to evaluate a legal problem without a comprehensive consultation and review of all the facts and documents at issue. This answer does not create an attorney-client relationship.

Kimberly Braunwarth August 17, 2011 at 1:14 pm

Hi Matt – Since the medicaid law changed regarding life estates and medicaid in 2006, I have been researching the issue and can’t get a clear answer because our situation doesn’t seem to fit the current regulations or maybe it does and I just don’t get it.
In 8/2004 my then 79 year old widowed mother sold her dulex with the intent of investing the proceeds to supplement her $800.00 SSA
income. Due to her age, income and health factors, my husband and I purchased a home and my mother helped out with the down payment. The deed and mortage is in our name. We gave her a life estate to ensure that if anything happened to us my Mom whould have a place to live. My mother never owned the home that we purchased. She has lived in it since the purchase date and pays for her utilities – we pay everything else. My mother’s lawyer has told us that the life estate is already registered with the state in the event she ends up in a nursing home and on medicaid. I understand that the new regulations mandate that the life estate is an asset, but does our situation really fit that regulation since she never owned the property? If the life estate still counts as an asset to her, is it exempt since she has lived in it since 8/2004? This property is in New Hampshire – I realize each state may deal with it differently but I can’t get an answer from DHS in New Hampshire. Can you give us some direction? Thank you.

Matthew Karr, Esq. September 26, 2012 at 2:28 pm

Hi Frank. If you transfer the house via a life estate and apply for Medicaid after 5 years they can only place a lien on the portion you still own (the life estate). If the house isn’t sold until after you die then the lien will go away, otherwise it will need to be paid. To sell the house you will need the permission of your daughters and vice versa. Each new transfer has it’s own five year look back period. I am only licensed in MA and my answers are based on MA law. Hope that helps.

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