Finances & Kids, Massachusetts Elder Law Planning , ,

Life Estate Deeds: The Pros and Cons

Save My House from a Nursing HomeMany Massachusetts homeowners use “life estate” deeds for different reasons. Some use them as a general estate planning tool. Others frequently use them as a way to “keep the nursing home from getting their house.” In this post, we’ll talk about “life estate” deeds and some of the pros and cons of using them.

What is a massachusetts life estate deed?

A life estate involves real estate. In basic terms, a life estate is when two or more people each have ownership in a piece of real property, but they have it for different periods of time. The person who holds the “life estate” has ownership of the property for the rest of their life. They get to use, occupy and get income from the property while they are living. This person is called the “life tenant.”The other owner (or owners) is called the “remainderman.” This person has a current ownership interest in the real estate, but cannot take possession of it until the death of the life estate holder (that “life tenant” I just mentioned in the previous paragraph).

Probably the most common scenario where we see life estate deeds used in Massachusetts is when aging parents decide that they want to keep a life estate in their family home and then leave it to their children as remaindermen so that they “don’t lose it to the nursing home.”  They’ll do this by signing a deed transferring the house to their adult children for $1 while keeping a life estate for themselves. When both parents pass away, the adult children will now have full possession of the home.

Why Do people use life estate deeds?

Some people will use life estates to avoid having the house go through the Probate Court. Remember, the life tenants only own the home for the rest of their lives so at the moment of their deaths, ownership will automatically pass to the remaindermen named in the deed. There’s no need to file anything in the Probate Court for the ownership to change hands.

Sometimes people use life estate for Medicaid planning (commonly called “nursing home” or “long-term care” planning). Medicaid is the government insurance program for people who meet certain low-income and asset guidelines. In order to obtain Medicaid benefits for skilled nursing home care, a person must meet these guidelines and to do that he/she must start giving away assets. When they do that, there’s a 5 year “look back” period in order for the asset that’s given away to not be considered for Medicaid qualification reasons.

When a homeowner transfers their property to their remaindermen and keeps a life estate, he or she is basically making a gift that will start the look back period clock running on the home. After 5 years go by, the remainder interest in the house can be protected and under current rules MassHealth won’t be able to exercise a lien for recovery against the real estate because it’s going to avoid Probate.

Be Careful with massachusetts life estates

While there are benefits associated with life estates, like anything in life there are always risks. One of the biggest downsides of giving away your house and only keeping a life estate is that you give up total control over your property. Even though you have a life estate, you now can’t just sell or mortgage the house without the agreement of those remaindermen. In fact, if you sell the house, you’ll even have to divide up the sales proceeds between yourself and your remaindermen!

Likewise, there could actually be very harsh capital gains consequences if you have to sell the house and a share goes to your remaindermen. When you made the remainder gift of your house, you basically gave your remaindermen the original cost basis in the property. When the house is sold, your remaindermen may actually owe capital gains tax on their share of the sale because the home might not be their principal residence like it is yours.

You also run the risk that the remainder interest that you gave away will get caught up by the creditors of your remaindermen. If one of your remaindermen has to file for bankruptcy or gets divorced, there’s a good chance there will be very negative consequences with having given away that remainder interest!

Finally, once you’re gone, your remaindermen will all likely be equal owners of your property. They might not all agree about whether to keep or sell the home. They might not all be willing to equally share in the costs of maintaining the home. We have seen many adult children end up fighting with each other and going to court to force the sale of their childhood home because they couldn’t all agree on what to do with the house.

What to do to accomplish your estate planning goals

We’re not saying that life estate deeds are bad planning tools and no one should take this post as legal advice. Every situation is unique and you should always consult with a qualified estate planning lawyer before deciding to transfer your property and retaining a life estate.

If you’d like to discuss your long-term care or estate planning goals and whether a life estate deed is for you, contact us now to set up your Family Legal Planning consultation.

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