Using a Life Estate Deed to Protect Your Home

by Matthew Karr, Esq. on January 6, 2011

As the saying goes, home is where the heart is. Home is also where cherished family moments have been made, where you find comfort from life’s frenetic pace, and it is quite possibly the largest single asset in your estate. Obviously the home is worth protecting, but how? One way to protect your home from long term care expenses is through the use of a life estate deed.

Some people assume that they can simply transfer the home to one of their children and it will be protected, however, it is not that simple. As with any transfer of your home, if not done properly there can be serious tax and Medicaid eligibility consequences.

A life estate deed is a deed in which you transfer the future ownership of your home but retain the current ownership, creating both a present interest and a future interest in the property. You, as the present interest holder, have the exclusive right to enjoy and live in the residence until you pass. You are also responsible for paying the ongoing expenses of the property, such as taxes, insurance and maintenance costs. The future interest holder receives the right to own and use the property after you pass. This allows the property to pass to your children or other person whom you wish to have the property as a matter of law without interference from the probate court.

There are several benefits to using a life estate deed. First, you are able to maintain security for yourself in your own home. Your future interest holder cannot move in or kick you out of your home, and even if creditors have a claim against your future interest holder’s interest in the property, it is not subject to partition and cannot be sold absent your consent. You can also retain any tax abatements that may have been available to you prior to the transfer, such as veterans and senior citizens exemptions. The future interest holder may not transfer or sell the property without your signature. However, you will also need the consent of your future interest holder to sell, mortgage, or refinance the property.

Another benefit of life estate deed is that because your home remains an asset of your estate for estate tax purposes, your future interest holder will receive a “step-up in basis” when they receive the real estate. This means that the property they inherit will be valued for tax purposes at the date of your death, not the date of the transfer value or the value that existed when you acquired the property. Because of this they should be able to avoid capital gains taxes when they decide sell the property.

Also, the transfer of the life estate deed triggers the waiting period for MassHealth (Medicaid) eligibility. This transfer will start the five year transfer period, after which the property should be protected and Medicaid benefits obtained. If you need nursing home care within five years of signing the life estate deed, you would have to pay privately for your care until the remaining penalty period ended. However, by retaining a life estate the penalty period will be much less than if you had transferred the property outright, since the penalty is based on the value of the transfer.

There are many considerations to take into account when deciding whether to use a life estate deed as part of your estate plan. Speak with a Massachusetts estate planning attorney to find out if this strategy could work for you.

{ 1 comment }

nan February 7, 2012 at 8:24 am

I understand that the life tenant is responsible for all expenses related to the property and insurance, now the big question, If the life tenant did not maintain insurance and becomes involved in a say slip and fall law suit where does this leave the remainderman? As I understand the remainder man has no control over the property so can the remainer man be sued too?

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