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By John M. Bigler A life estate is an ownership interest in property for a period of time that is limited to the life of the person who is holding the life estate. It is an attempt to prevent a person's home from being used to pay for catastrophic care or nursing home care. The life estate terminates upon the death of the person holding it. A second party is designated as the owner(s) of the remainder interest of the property. On the death of the life estate holder, the owner of the remainder interest is automatically the full owner of the property. In addition to the life estate, an irrevocable trust is another tool which may be used simultaneously in order to acquire the flexibility of selling the home in the future
Very often, in contemplating a transfer of the home for Medicaid planning, other dangers are overlooked. If the house is transferred outright to a child and that child has a financial problem or is involved in a lawsuit, the grantor may find themselves without legal rights to stay in the house. The life estate protects the grantor's rights in that it allows the grantor exclusive possession of the property until death. Even if the grantee is sued and his interest in the property is attached, the creditor does not have the right to evict the life estate holder.
There are some problems which one must be made aware of before executing the life estate. If a person with a life estate applies for Medicaid in a nursing home, the Department of Social Services will ask him to sign an assignment of life estate. This means that if the house is sold during the lifetime of the person the same IRS actuarial table that is used to determine the life estate holder's percentage of ownership in the property for gift tax purposes will be used to determine what share of the profits of that house is attributed to the life tenant and would, therefore, be assigned to Medicaid. It would, therefore, be a disaster to sell the house during the lifetime of the life estate holder if that person is in a nursing home. Another disadvantage is that even if a senior is not in a nursing home, is healthy, and only owns a life estate on the premises, when they sell their home they can only use that percentage of their $125,000 senior citizen's capital gains exemption that represents their life estate share. Both of these drawbacks can be eliminated by making the transfer into an irrevocable trust instead of a single deed. An additional drawback is that, in the event of the institutionalization of the life estate holder, and if the house is rented then the net rental income must be paid over to the nursing home to reduce Medicaid's expense. The life estate holder is entitled to any income that the property produces. Although this sounds cumbersome, it really is not such a terrible consequence compared with the benefits of a life estate. Remember, Medicaid is only entitled to request the net income. That means that all reasonable property expenses can be deducted from the rent. After deducting real estate taxes, homeowner's insurance, water bill and repairs, the net rental income will usually be minimal. Obviously, there are plusses and minuses in determining whether a life estate is the right course to follow. In many cases a life estate will be a very useful planning tool for a senior citizen or a disabled person. Whether or not it is appropriate in any individual case should be decided with the advice of an experienced elder law attorney. Reprinted with permission of the Suffolk Times © 1999 [ Contact Us ] [ Guestbook ] [ Email ]  The Law Offices of John M. Bigler, Attorney At Law 1421 Wantagh Avenue, Wantagh, New York 11793-2206 1-888-ELDER-LAW · 516-409-6565 · Fax: 516-409-6522 E-Mail: info@biglerlaw.com · Web Site: www.biglerlaw.com |
The benefits of a life estate include the fact that although Medicaid has the right to attach a lien to any property that passes through the estate of a person receiving Medicaid or their spouse, no lien can be attached to a life estate. This is because the interest of the life estate holder in the property dies with that person. Another significant benefit to the life estate holder is that they may maintain a senior citizen's real estate tax exemption which would be lost if the house was transferred. Also, in determining the penalty period for Medicaid purposes for transferring the home, the Department of Social Services will only figure the value of the future interest given to the children, not the entire value of the house. This results in a smaller penalty period than if the house was being transferred without a life estate.
Possibly the most important benefit of the life estate is a stepped-up basis. When a house is inherited either through a Will or by law, the child will inherit the house with a fair market value basis at the time of death. In contrast, when a house is simply transferred during one's lifetime, the child will receive the parent's cost basis in the home. For example, if the house was originally purchased in 1950 for $10,000.00 and is now being sold for $200,000.00, (assuming no improvements were made), there will be a $190,000.00 capital gain which will result in a significant payment of taxes. If, on the other hand, the house is inherited after death through a life estate, the child will have a basis of $200,000.00 and when if the house is sold for that amount, there will be no capital gains tax. This is known as receiving a step-up in basis. By transferring the house to the children but keeping a life estate, the children will receive the same step-up in basis at the parents' death. Therefore the reservation of a life estate causes the property to be included in the estate of the individual who reserved the life estate. It can be used solely for tax benefits or to ensure that the grantor has a place to live until death. However, if the estate is worth over $600,000 other circumstances would apply.