Creating a “life estate” in your home can be an effective estate planning technique as well as an effective asset protection plan with respect to nursing home planning, but beware of the pitfalls. A “life estate” can be created in real estates, like your home. The homeowner transfers the home by a deed that is recorded in the county recorder’s office where the home is located. Most commonly, the parent(s) will transfer the home to their children and the deed must expressly reserve to the parent(s) a “life estate.” The parents then own a “life estate” while the children own the “remainder interest.” This means that the parents retain the right to own the property for the rest of their lives, which, in turn, entitles them to live in the home for as long as they are able. Upon the death of the parent(s), the children will then automatically become owners of the home, without the home going through the slow, expensive court process known as “probate.” Sounds great, right? However, beware of the pitfalls. First, with a “life estate,” the parents are still obligated to pay all of the costs of house ownership: real estate taxes and assessments, utilities, insurance and maintenance. Second, the parents can only sell their “life estate.” They cannot sell the children’s “remainder interest” unless the children also agree to sell their “remainder interest,” and then, the sale proceeds should be divided between the parents and the children according to their interests. Creditors of the children can obtain judgment liens against the children’s “remainder interest.” The parents will lack the ability to re-finance the home because of the children’s “remainder interest.” Finally, a transfer creating a life estate can present problems if a parent needs nursing home care and seeks Medicaid benefits to pay for that care. Medicaid treats a transfer of a remainder interest as a gift, which causes a Medicaid penalty if a Medicaid application if filed within five (5) years of the transfer. Although there can be benefits from creating a “life estate,” you need to be cautious and consider all of the ramifications before doing so. I recommend consulting with an attorney experienced in estate planning and Medicaid planning before making the decision.
I’m always being asked by my doctor if I have a Living Will or advance directive documents. What are these? by Jesica Thorson