Clients often call me and want their home transferred to their children while they maintain life use (a "life estate"). Their goal is to make sure their house is protected in the event they need long-term care Medicaid, whether that be home care or nursing home care.  For some, a life estate may make sense. For others, it may have pitfalls which can irrevocably harm them. Using a life estate as part of an estate plan and Medicaid planning is popular, it is easy to do, and it is relatively inexpensive. However, it is a quick fix and it is oftentimes not the best option to protect the value of your estate or to preserve your estate for your heirs. 

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 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 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.

What Are Some Potential Issues With Life Estates?

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 can not sell or mortgage property with a life estate interest. The remaindermen must all agree if you decide to sell or borrow against the property.
• If the property is sold during your lifetime, the remaindermen are entitled to a share of the proceeds equal to what their interest is determined to be at that time.
• The property is at risk from your remaindermen's legal issues such as judgments, lawsuits, and divorce. I have come across this many times: Parents deeded property to their children and held life use, the parents eventually passed away and the children sold the property. One of the siblings had money judgments and those judgments went against the title of the property. Those judgments had to get paid out of the sale proceeds to clear the title to the property which diminishes the property value. This leads to fighting between the siblings, bad feelings, etc. Exactly what the parents were trying to avoid. Further, if one of the remaindermen is going through a divorce there is a chance that that remainderman's interest could be considered marital property which means that their spouse would get 1/2 of their interest in a divorce proceeding. 
• If the remaindermen have to sell the property while you are in a nursing home or receiving Medicaid, Medicaid will calculate the value of your life estate share and will take that amount from the sale proceeds even if you met the 5 year lookback. Thus, not completely protecting the asset from Medicaid.

As with most planning tools, a life estate can be useful, but it is not for everyone. In many cases, the potential problems outweigh the benefits. I will normally recommend an Irrevocable Trust over a life estate deed and will discuss the benefits in my next article.  As the law in this area is complex, it's important to talk to an experience estate planning attorney. Contact me today for a free consultation.