A life estate is a transfer of your property by deed that allows you the unrestricted right to occupy the property for your lifetime. Upon your death the property automatically transfers to the remaindermen, the people that you wish to receive the property upon your death. If you move out and rent the property, you have the right to the rental income.
Creating a Life Estate is considered a gift by MassHealth (Medicaid). You are keeping the right to live in the property for the rest of your life and giving away the right to the property after your death, the remainder. Because you may not give away all of your assets and immediately qualify for MassHealth, a disqualification period is assessed for making the gift.
To determine the disqualification period, the starting point is the assessed value of the property. Life estate tables are then used to determine the value of the Life Estate and the remainder. The look back period is five years. This means that in order to be protected from nursing home costs, the Life Estate must have been created over 5 years ago.
Pros and Cons for a life estate:
· To start with, the right of the elder to stay in the house is protected. No matter what happens to the remaindermen, marriage, divorce, bankruptcy…the right to stay in the house is protected.
· The home avoids probate
· The children (remaindermen) receive a step-up in basis upon the death of the parent(s) and can sell the property tax free.
The problems with a life estate are as follows:
· If the property is sold during the life of the elder, the proceeds are divided upon the sale. This means the elders get a portion of the proceeds and the children get a portion of the proceeds. These amounts are determined in the same fashion as above, using actuarial tables. This generally means that the children will have to pay income taxes on the proceeds they receive. If the elder is in a nursing home at the time of the sale, their share will be subject to a lien by the Commonwealth for past nursing home costs.
· If the elder needs nursing home care and the house becomes vacant, it becomes an insurance nightmare. All standard homeowner insurance policies are void if the home is vacant. Insurance is available for vacant property, but it is very expensive.
· Unexpected death of a remainderman. If you had reserved a life estate and your child had predeceased you, you might end up with the in-laws owning your home, where you might have wanted it to go to your grandchildren instead.
The ideal candidate for the life estate is someone who says, “I plan on living her for the rest of my life and would never sell!!!”.
This article gives general information and not specific advice on individual matters. Persons wanting individualized advice on matters discussed should contact an advisor experienced in those matters. To the extent this article provides information on legal matters, it is based on law in effect in Massachusetts on the date of posting (laws in effect in other states are often quite different).
Ronald H. Surabian is a CPA and attorney who works at the Elder Law Center in Saugus, Massachusetts. He also holds a masters in accounting and a masters in tax law. He currently serves on the litigation and public policy committees of the Massachusetts Chapter of the National Academy of Elder Law Attorneys, and President of the Friends of the Saugus Senior Center. If you have any questions please call me at the Elder Law Center, One Essex Street, Saugus, MA 01906 (781)233-4444. To view this or any prior article, please visit our web site at www.elderlawcenter.org