A life estate 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 is essential in determining whether it is appropriate for your situation.
What are Life Estates?
In a life estate, two or more people each have an ownership interest in a property, but for different periods of time. This allows parents to pass ownership in their homes to their children while retaining absolute possession of the property while they are alive. 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.
The person holding the life estate possesses the property during his or her life. This person is called the life tenant. The other owner of the property is called the remainderman, or remaindermen (plural). The remainderman has a current ownership interest but cannot take possession of the property until the death of the life tenant. Additionally, 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.
Potential Problems for the Life Tenant
While a life estate can be a valuable planning tool, there are potential issues that may arise. It’s important to fully understand the following risks:
1. Limits on Life Tenant’s ability to sell or mortgage the property
As the life tenant, you may not easily sell or mortgage a property with a life estate interest. The remaindermen must all agree in order for you to sell or borrow against the property.
Solution A: Testamentary Power
A testamentary power of appointment in the deed is a mechanism that permits the life tenant(s) 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.
Solution B: Nominee Realty Trust
A nominee realty trust permits one or more children to act as trustee(s) for all the children. The trustee(s) are required to follow the direction of a majority of the beneficiaries. For example, if a life tenant with four children wishes to sell the property and three of the children agree but one child objects, the majority can direct the trustee to sign the papers necessary to facilitate the sale. And if the property is sold, the remaindermen are entitled to a share of the proceeds equal to whatever their interest is determined to be at that time.
2. Removing a Remainderman is difficult
Unlike a beneficiary on a life insurance policy or bank account, it is not easy to remove or change a name on a real estate deed. Should you decide to revoke a child’s interest in the property after the life estate is established, it may be very difficult to do so.
3. A Remaindermen’s problems can become your problems
Once a remainderman is named on the deed to your house, he or she has an interest in that property. And that means his or her legal problems can become your problems too. Here are a few examples:
• If a remainderman is sued or found to owes taxes, a lien can be filed against your home.
• If a remainderman files for bankruptcy, their interest in the property is not protected.
• If a remainderman gets a divorce, his or her spouse could claim all or part of their interest in your home.
• If a remainderman predeceases you, their estate would have to go through probate unless at least one other remainderman was listed as a joint tenant.
And while these claims may be made against the property, no one can force you to move out of the property during your life.
4. Medicaid Complications
With a life estate, giving away an interest in the property could disqualify you from receiving assistance from Medicaid, if you require long-term care within five years of the transfer.
5. Nursing Home Complications
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 any payments it has made on your behalf. However, the share of the proceeds allocated to your remaindermen would be protected.
In conclusion, as with most estate planning tools, a life estate can be very useful, but it is not for everyone. In many cases, the potential problems outweigh the benefits. As the law in the area of life estates is complex, it’s important to talk to a lawyer who knows about this in-depth.
It is extremely important to talk with your attorney before creating any estate planning or legal documents, especially such a tools as a life estates. Consult with the estate planning attorneys at Elville and Associates to make sure you have all the estate planning and legal documents you need. The firm offers free consultations for estate planning clients to understand your situation and goals and create a path forward for your family and you, offering peace of mind along the way. To set your initial consultation, contact Legal Administrator Mary Guay Kramer at mary@elvilleassociates.com, or by phone at 443-741-3635.