What is a Life Estate?

(This article was originally published in the Wakefield Daily Item)

By LUCY J. BUDMAN, ESQ.

Q.   Is a Life Estate deed the best way for me to avoid probate of my home? 

 A.  While a Life Estate can avoid probate, you should also consider other probate avoidance strategies that can offer you more flexibility and protection.   

For most people their home is their most valuable asset and the one they want to make sure passes to their loved ones upon their death.  Before you can decide whether or not a Life Estate deed is right for you, you must consider your goals and the costs and benefits of a Life Estate deed.

A “Life Estate” means that you sign a deed conveying your home to someone else – let’s say your children – and you reserve a Life Estate for yourself (and your spouse, if married).  This guarantees you (the “life tenant”) the right to use and occupy your home for the rest of your life, then upon your death, the home passes outside of Probate directly to your children (the “remaindermen”).

Sounds simple, right? It can be if everything goes exactly right. But, if you want to refinance, move, or sell the property before you die, a life estate can cost a lot more than you expected. Some issues that can come up include:

  1. A Life Estate deed is irrevocable and you cannot undo the transfer without permission from the remaindermen, in this case your children.  If you decide that you want to sell, you must get permission from your children.  While you may trust your children implicitly, what if they become incapacitated or die, or what if they simply think they know what is better for you?
  2. Beware of negative capital gains tax consequences for your children if you sell the home during your lifetime.  Federal tax laws offer very favorable treatment for homeowners selling their primary residences.  But in the case of Life Estate deeds, the remaindermen do not typically live in the property so it is not their primary residence.  As a result, your children could owe tens of thousands of dollars of capital gains taxes upon the sale of your home if you sell it while you are alive.
  3. If you and the remaindermen agree to sell the home during your lifetime, you are entitled only to a portion of the proceeds based upon IRS tables, and the rest of the proceeds go to the remaindermen.
  4. Beware of refinancing because in most cases you will need the remaindermen’s permission and they must agree to be liable on the mortgage. Some banks simply refuse to offer financing for Life Estate property.
  5. If you do not keep your end of the bargain (paying real estate taxes, utilities and reasonable maintenance) for any reason, the remaindermen can sue you for damaging or wasting “their” property.
  6. MassHealth can deny your application and disqualify you for MassHealth benefits if you require MassHealth nursing home benefits within five years of the date of the Life Estate deed.  When you sign a Life Estate deed, you are making a substantial gift to your children.  MassHealth imposes gift penalties on all gifts within the five year look back period.
  7. Even if more than five years have elapsed since you signed the deed, if you require MassHealth nursing home benefits, MassHealth can record a lien on the property.  If the property is then sold during your lifetime, the MassHealth lien must be paid off.  Also, MassHealth will not allow you to use your income to maintain the home if you are in a nursing home, thus your children will not be able to sell the home, but will need to step up and cover the home costs including taxes, utilities and insurance.
  8. While most people will not pay an actual gift tax for singing a Life Estate deed, they are often still required to file a special gift tax return with the IRS. You should check with your tax advisor to understand your personal situation.

The bottom line is that while a Life Estate deed can help some people, you need to first consider all of these issues so you can make an informed decision.  You might save some money upfront setting the deed up, but tax costs, family issues and a lack of flexibility can end up costing you a lot more down the road. Other alternatives, such as Trusts, may be more costly to set up but save you stress and headaches as your life and situation changes.

If you already have a Life Estate deed, you may be better off leaving it the way it is but be sure to consult an attorney before selling the home or changing the deed in any way.

Many people say they never want to sell their home, but no one has a crystal ball—five, ten, fifteen years down the road, do you really want to be locked in? Before considering a Life Estate deed, speak with a qualified Elder Law Attorney to discuss the pros and cons both today and down the road.

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Do you have an Elder Law or Estate Planning question? E-mail questions to Info@CurleyLawFirm.com or call 781.245.2222 x10 to be considered for future columns).

About Curley Law Firm LLP

Serving clients throughout Massachusetts, Curley Law Firm LLP draws upon more than four decades of combined Estate Planning and Elder Law experience to ensure that you can achieve your planning goals.

Attorneys Patrick Curley and Lucy Budman are two of fewer than two dozen Certified Elder Law Attorneys (CELA) in Massachusetts. Attorney Mark Curley has practiced in the areas of Estate Planning and Elder Law for over three decades.

The value of working with a firm with CELAs on the team is the peace of mind you receive - knowing that you will get the very best advice available to protect yourself, your family and your assets. A CELA is a recognized expert in legal matters dealing with Estate Planning and Elder Law including Trusts, Wills, Asset Protection against Medicaid and nursing home costs, Medicaid (MassHealth) benefits planning and applications, Probate and Trust administration, Guardianship and Conservatorship, and VA benefits planning.

At a time when many lawyers claim to practice "elder law", having a CELA-led team working on your planning means having one of the very few experts in the Commonwealth on YOUR team.

For experienced representation and quality service from attorneys who will help you achieve your planning goals, please schedule a confidential Initial Consultation by calling us at (866) 406-8582 or visit our website at www.CurleyLawfirm.com

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