A “life estate” is a form of property ownership where a person, called the “life tenant,” owns property only through their lifetime. Upon the life tenant’s passing, the other owner, called the “remaindermen,” take full ownership of the property. For example, you can give your home to your children, but retain a “life estate,” thereby retaining control of the home during your lifetime. Your children would be the remaindermen and take control after your passing.

Why would you want a life estate?

Probate avoidance. When using a life estate deed, the property passes automatically to your children without having to go through probate court.

Medicaid/MassHealth planning. Setting up a life estate will trigger the five year look back period for Medicaid/MassHealth eligibility. A life estate can protect the value of the home from the MassHealth Estate Recovery Unit. However, a lien can be placed on the property, but only up to the value of the life estate, not the full value of the property.

Capital gains tax planning. Folks will occasionally ask if they can gift property to their children. Gifts have a variety of significant tax implications. By using a life estate, the remaindermen will get a step-up in basis on the property. This means they inherit the property at the date of death value, not the date at which the property was acquired. This can significantly reduce or eliminate capital gains taxes.

Are there drawbacks to life estates?

There are some risks to be aware of:

• The life tenant cannot easily sell or mortgage the property. The remaindermen must all agree and could demand a share of any sale proceeds.

• Once the remaindermen are included on the deed, they have an interest in the property. This means if they have marital problems, legal issues, or questionable solvency, a lien could be placed on the property. However, even if claims are made against the property, you can’t be forced out of the home.

Solutions:

To help protect against these potential problems, we can include a testamentary power of appointment in your life estate deed. Last year in Dennis A. Skye v. Lisa A. Hession (Mass. Appeals Ct. No. 16-P-282, April 28, 2017), the Massachusetts Appeals Court affirmed the validity of powers of appointment in life estate deeds.

What this means. The testamentary power of appointment, referenced above, allows the grantor to change the remaindermen through her will. Not only does this allow folks to adjust to unforeseen circumstances, it also provides leverage over uncooperative children, who should understand that their lack of cooperation could mean loss of inheritance.

If you or a loved one are thinking about long-term care and protecting the value of the home, book an appointment today to discuss your options.