Tag Archives: Life Estate

What Is a Life Estate?

Posted on by

The phrase “life estate” often comes up in discussions of estate and Medicaid planning, but what exactly does it mean? A life estate is a form of joint ownership that allows one person to remain in a house until his or her death, when it passes to the other owner. Life estates can be used to avoid probate and to give a house to children without giving up the ability to live in it. They also can play an important role in Medicaid planning.

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.

When the life tenant dies, the house will not go through probate, since at the life tenant’s death the ownership will pass automatically to the holders of the remainder interest. Because the property is not included in the life tenant’s probate estate, it can avoid Medicaid estate recovery in states that have not expanded the definition of estate recovery to include non-probate assets. Even if the state does place a lien on the property to recoup Medicaid costs, the lien will be for the value of the life estate, not the full value of the property.

Although the property will not be included in the probate estate, it will be included in the taxable estate. Depending on the size of the estate and the state’s estate tax threshold, the property may be subject to estate taxation.

The life tenant cannot sell or mortgage the property without the agreement of the remaindermen. If the property is sold, the proceeds are divided up between the life tenant and the remaindermen. The shares are determined based on the life tenant’s age at the time — the older the life tenant, the smaller his or her share and the larger the share of the remaindermen.

Be aware that transferring your property and retaining a life estate can trigger a Medicaid ineligibility period if you apply for Medicaid within five years of the transfer. Purchasing a life estate should not result in a transfer penalty if you buy a life estate in someone else’s home, pay an appropriate amount for the property and live in the house for more than a year.

For example, an elderly man who can no longer live in his home might sell the home and use the proceeds to buy a home for himself and his son and daughter-in-law, with the father holding a life estate and the younger couple as the remaindermen. Alternatively, the father could purchase a life estate interest in the children’s existing home. Assuming the father lives in the home for more than a year and he paid a fair amount for the life estate, the purchase of the life estate should not be a disqualifying transfer for Medicaid. Just be aware that there may be some local variations on how this is applied, so check with your attorney.

To find out if a life estate is the right plan for you, contact your attorney.

What Are the House Ownership Options When Parents and Adult Children Live Together?

Posted on by

Increasingly, several generations of American families are living together. According to a Pew Research Center analysis of U.S. Census data, 64 million Americans, or 20 percent of the population, live in households containing two adult generations. These multi-generational living arrangements present legal and financial challenges around home ownership.

Multi-generational households may include “boomerang” children who return home after college or other forays out into the world, middle-aged children who have lost jobs, or seniors who no longer can or want to live alone. In many, if not most, cases when mom moves in with daughter and son-in-law or daughter and son-in-law move in with mom, everything works out well for all concerned. But it’s important that everyone, including siblings living elsewhere, find answers to questions like these:

  1. If mom owns the house, what happens when she passes away? Do daughter and son-in-law have to move out? If mom leaves them the house, is that fair to the other siblings? If she leaves them her savings and investments instead, what happens if that money gets spent down on her care?
  2. If mom pays for an in-law addition to be built on daughter and son-in-law’s house, what guarantees should she have about being able to live there? What happens if, despite everyone’s best intentions, mom moves out either because living together isn’t working out or she needs care that the family can’t provide? Do the daughter and son-in-law simply get the advantage of the increase in value to their property? What if mom needs the money she put into the house to live on? What are the Medicaid issues if she needs nursing home care within five years?
  3. What are everyone’s expectations in terms of paying living and housing expenses?
  4. What happens if daughter gets a great job offer in another city? Or daughter and son-in-law get divorced?
  5. If grandchildren are still living at home, is mom expected to help with child care?
  6. How do the answers to all of the questions change if mom and daughter and her husband are pooling their resources to purchase a new home for everyone?
  7. Who will care for mom if she becomes disabled? Is daughter expected to give up her work to provide the care? Should she be compensated? What about using up mom’s financial resources to pay for care providers?

It is difficult to answer many of these questions in the abstract, but having an open discussion about them at the start, writing down the answers, and reviewing the questions and answers as circumstances change, can help avoid misunderstandings and potential recriminations down the road.

The answers to these questions may lead to different forms of home ownership that can help achieve the family’s goals.  Here are some of the options:

  1. Joint Ownership. If mom, daughter, and (perhaps) son-in-law own the house as joint tenants with right of survivorship, when mom passes away the house will go to the other owners without going through probate. This has an advantage if mom ever needs Medicaid to pay for home or nursing home care because it may avoid the state’s claim for reimbursement at her death (usually referred to as “estate recovery”) Some states have expanded the definition of estate recovery to include property in which the recipient had an interest but which passes outside of probate, so property in joint ownership may be included in estate recovery in those states. If the house is sold while the owners are alive, the proceeds (absent another agreement) will be divided equally among the co-owners.
  2. Tenants in Common. If mom, daughter, and son-in-law own the house as tenants in common, mom’s share at her death will go to whomever she names in her will. This may be fairer to other family members, but does not avoid probate. As with joint ownership, if the house is sold while all the owners are alive, the proceeds (absent another agreement) will be divided equally among the co-owners.
  3. Life Estate. A life estate is a form of joint ownership where mom as the “life tenant” has the right to live in the house during her life and at her death it passes automatically to the “remaindermen” who can be anyone she names — daughter or son-in-law or all of her children equally. Like joint ownership, it avoids probate and thus may also avoid Medicaid estate recovery. If the property is sold, the proceeds are divided up between the mom and whoever is on the deed as remaindermen, the shares being determined based on mom’s age at the time — the older she is, the smaller her share and the larger the share of the remaindermen.
  4. Trust. Putting the house in trust is the most flexible approach because a trust can say whatever the person creating it wants. It can guarantee mom the right to live in the house and compensate daughter and son-in-law for the care they provide. It can also take into account changes in circumstances, such as daughter passing away before mom. At the same time, it avoids probate and Medicaid estate recovery.

All of these options have different tax results in terms of capital gains when the home is sold, as well as different treatment by Medicaid if mom needs help paying for care. It’s best to consult with your attorney to determine what makes the most sense in your particular situation.