Is a Life Estate Right for You?

Creating a life estate as part of your estate planning portfolio might be a good idea so long as you understand the benefits and potential risks involved. If you have been properly advised by an estate planning lawyer, a life estate can be an excellent financial plan for your heirs while allowing you to remain in your house over your lifetime.

What is a Life Estate?

A life estate is a transfer of a future interest in your property while you retain the current or present interest. The future interest owner is called a remainderman. As the present owner, you have most of the privileges and obligations of ownership that includes paying the property taxes, maintenance and insurance.

Aspects of a Life Estate

The main aspect, and benefit, of transferring a future interest in your property is that it avoids probate and confers ownership of the property to your heir without court interference or approval. Other benefits include:

  • – Securing the home for yourself.
  • – Your children will automatically have a home or an asset without the need for a formal transfer.
  • – Your property still cannot be sold without your consent, though you will need the consent of the remaindermen if you wish to sell or mortgage the property during your lifetime.
  • – The remaindermen cannot sell their future interest without your consent.
  • – While creditors could place a lien on the remainderman’s future interest in the property, they cannot force a sale of your property or force a partition.
  • – You retain any tax abatements that existed before you transferred your interest such as exemptions for senior citizens.
  • – The future remaindermen are entitled to a step-up in basis when the property at your death, meaning that the value of the home for estate tax purposes, if it applies, is of the date of your death. Consequently, your heirs can avoid capital gains taxes when they decide to sell the property.
  • – To become eligible for Medicaid, the date of the future interest transfer triggers or begins the 5-year waiting rule pursuant to Massachusetts law.
  • – If you do need nursing home care before the 5-year period expires, you will have to pay for the care without the benefit of Medicaid but the penalty period is less since it is based on the value of the future interest on the date you transferred it.

There are some negative aspects as well:

  • – Creditors can claim an interest on the remaindermen’s interest and place a lien on it.
  • – You cannot remove the remaindermen’s name on the title or deed without a transfer of their real estate interest and without their consent.
  • – If your child is a remainderman and divorces, the spouse could claim your child’s interest in your property.
  • – If you do get the consent of the remaindermen to sell your property, they can claim a right to the proceeds for the value of their future interest.
  • – If the remainderman predeceases you and no other remainderman was named, the property will have to be probated when you pass away.
  • – By transferring property, you could jeopardize your right to nursing home benefits under Medicaid before the five year look-back period expires.

A life estate can be a useful tool for you as part of your overall life estate planning. Discuss this with estate planning lawyer Patricia Bloom-McDonald of Massachusetts before you create one to ensure you fully understand the consequences to yourself and to your heirs. For decades, Attorney Bloom-McDonald has been practicing elder law and estate planning; representing the interests of seniors and those of anyone who wishes to update or create an estate planning strategy for themselves. Call her office today for a complimentary initial consultation.