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Lee Turner, Attorney at Law » A Short Primer on Life Estate Deeds
Lee Turner, Attorney at Law » Page 'A Short Primer on Life Estate Deeds'

A Short Primer on Life Estate Deeds

I routinely field calls from people, mostly elderly inquiring about a life estate deed for their home and property.  To help shed some light on the subject I wanted to post an excerpt from fellow blogger attorney Brian Treacy concerning life estates:

From Treacy’s Blog

Very often clients want to “protect” their home for the family. Some think the best way to do this is giving it giving to other family members. More typically the question that is asked in this manner:  “How do I add my children’s name to my deed?”.  While protecting the home is a legitimate concern, there are smart ways and bad ways of achieving that goal. There is tremendous risk when transferring outright ownership to other family members, including harmful tax implications. It is just as harmful to simply add a child’s name to your deed.

 A preferable method of transfer is called a Life Estate Deed

A typical Life Estate deed legally transfers the future ownership in real estate, and reserves rights of current ownership in the person making the conveyance. This is different than an outright transfer where no strings attach to the person making the conveyance. A “life estate” is similar to the concept to a timeshare. With a timeshare, a person owns the right to use property during a designated period of ownership. An owner of a life estate has the right to live in the property for a lifetime. The lifetime right automatically terminates upon death when persons designated in the deed become outright owners.  

A Life Estate Deed used for basic Estate Planning is a way to transfer ownership of property at death in the same way one might want to in a Will. The benefit of this transfer is that the Life Estate deed AVOIDS PROBATE. Thus, it is a simple, and inexpensive, way to transfer ownership of the home at death.          

 Use of a Life Estate Deed in Medicaid planning is a method to protect the home and have it considered an “exempt asset” for Medicaid purposes, meaning you can own a life estate and still ask Medicaid to help finance your nursing home care.                              

Let’s look at the list of potential benefits of a parent(s) using the Life Estate deed as a planning tool to convey a home to children:                

1) the parents retain the same legal right to live in, sell, or rent, the property;
2) the parent continues to qualify for any property tax exemptions such as veterans and senior citizens exemptions that were available prior to the transfer;
3) the children can’t make the parent move out;
4) the children’s creditors or bankruptcy trustee, can’t take possession of the property;
5) capital gains when the children sell the home after parent’s death will be calculated the same way it would be if the property passed to children at death ( i.e., the property gets a stepped-up tax basis); and
6) since the value of the parent’s retained interest is now lower than the full value of the house, a gift of the remainder interest result in a shorter Medicaid penalty period than a transfer of the entire house;
7) parents, not the children, will still be responsible for the payment of all taxes, insurance and maintenance on the home. 

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

 To determine exactly how a gift of a remainder interest will affect eligibility for Medicaid, the look-back period and the value of the transfer must be considered.  The transfer is not considered to be for the full value of the house but only the “remainder interest” in the house. The remainder interest is the right that the children have to receive the home automatically upon the death of the parent. The value of the remainder interest is calculated using special actuarial tables that determine the parent’s life expectancy. The number of months of ineligibility is calculated by dividing the value of the transfer by a number known as the “penalty divisor”  Medicaid cannot require an applicant to liquidate the life estate or to rent the life estate interest property.  However, if the property is rented, the net rental income must go to the nursing home resident and will be counted in determining eligibility for Medicaid.

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