Considering a Life Estate? Understand the Potential Problems
Life estates are often used by attorneys to pass real estate to the next generation outside of the probate process. However, keep in mind that there are potential problems and risks to understand before creating a life estate. Even attorneys are often unaware of the issues surrounding life estate deeds. Continue reading to determine whether a life estate might be 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 estate deeds 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, but this strategy only works if the transfer is outside of the Medicaid lookback period, and there are other issues and risks to consider.
Potential Issues and Risks
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. 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. Often life estate deeds are signed without any thought about the need for Medicaid, and these deeds can practically be difficult to reverse, especially when a remainderman dies or has an uncooperative spouse. 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 Elder Law Attorney
As with most planning tools, a life estate can prove useful and have several valuable benefits, but it is often not the best solution. 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. Talk with your team at LawyerLisa about the best way to transfer your home to your heirs at your death.
