Estate Planning with a Life Estate Deed
People are growing increasingly nervous about retirement and healthcare. For good reason. The health insurance market has grown alarmingly costly. As a result, more people than ever are turning their attention to Medicaid – how to qualify and most importantly, how to protect their assets. While much has been written on Medicaid’s eligibility requirements and procedures, most people are still unware of the agency’s greatest concerning and disturbing practice.
For homeowners on Medicaid (you can still qualify if you own a home and use it as your primary residence), there is a grave risk that upon your death, if the state agency cannot recover the amounts they paid out to hospitals on your behalf to nursing homes, doctors, hospitals, etc., from assets of your estate, a sale will be forced on your home in order to secure proceeds to satisfy the agency’s claim. This rule of thumb applies even if you own the property with another person (ie tenants in common).
For individuals approaching retirement age or even persons currently on Medicaid, this news isn’t entirely dire. Chances are you still have time for modest estate planning. If you are planning for homecare in the near future or can imagine circumstances leading to a nursing home residency, you need to start mapping out an estate plan with an estate lawyer to protect your home and assets from the reaching hands of Medicaid. Lien estate recovery is not an exception; it is a rule.
The most popular and well known estate planning strategy is the Irrevocable Medicaid Asset Protection Trust (also known as the “MAPT”). The major upside to trusts is the flexibility in choosing beneficiaries and retaining control of your assets. The downside is that trusts typically cost thousands of dollars to create. Since trusts can be too costly for some people, as an alternative to creating a trust, you may come to consider the notion of a life estate deed. A life estate deed involves the transfer of ownership from your name to someone else. Although you are no longer the owner of the property, you have the legal right to reside in the property for as long as you live. The use of a deed as an estate planning tool can be very tricky and hazardous without experienced legal representation.
The following are some of the pros and cons of creating a deed with a life estate for estate planning purposes:
Life Estate Pros
- By way of a life estate deed, you and your spouse have the absolute legal right to reside in the home (without the payment of rent) for the rest of your lifetime. You can continue living in your home without the fear of being evicted by the new deed holder (typically your children). A lifetime occupancy can also be achieved with a Medicaid Asset Protection Trust.
- The life estate tenant is entitled to all rental income from the property during their lifetime. This can also be accomplished with a Medicaid trust.
- At the death of the life estate holder, no estate court proceeding needs to be filed to transfer ownership of a home to a beneficiary or an heir. Similar to real estate placed into a trust, the home passes outside of probate. At death, the life estate is terminated and the deed holder owns the home free and clear.
- Medicaid has no recovery remedy against the home since the property avoids probate and is therefore not considered an estate asset subject to state lien recovery laws. In other words, if Medicaid has a claim against your estate for medical expenses, they will have no choice but to seek reimbursement from other probate estate assets or recover nothing at all. Same rules apply to real estate placed into a Medicaid trust.
- As with a transfer into a trust, a deed transfer with a life estate triggers Medicaid’s five year look back period. The clock starts from the date of transfer. What this essentially means is that as soon as you transfer the deed (or transfer the home into the trust), the sooner you will be eligible for nursing home care. The longer you wait the more detrimental to you and your estate.
- Life estate deeds are cost-effective and quick. While trusts can take weeks to prepare and finalize, a deed can take an estate lawyer a few hours to prepare.
Based on the foregoing, it may seem that life estate deeds and Medicaid trusts are not typically far off from each other. As such, one may be tempted to ask: why pay thousands of dollars for a trust when the same result can be accomplished with a deed? This is the question that many estate planning clients face. Consider the following downsides to help you learn and understand some of the issues you may face with a life estate deed.
Life Estate Drawbacks
- The first and most important conflict is one of control. Transferring ownership of your home to someone else gives the new deed holder a free hand to do as he or she pleases without your consent. Other than eviction, the new owner can take out a mortgage, refinance the home, and even transfer the deed to another (subject to the life estate).
- The new deed holder must consent to any sale or transfer of the property. Without their approval and cooperation, your hands are tied.
- Following the transfer of ownership, you can no longer change the eventual beneficiary of the home. Once the deed is executed, you cannot undo the transfer without the new owner’s consent. A trust, on the other hand, permits you to change the beneficiaries in your last will and testament by a power of appointment clause.
Example: Alex transfers his home to his only son Jason, via a life estate deed. In his mid 60’s, Alex falls in love and marries Anna, who has three kids from a prior marriage. Alex adopts the three children and claims them as his own. Jason’s true intentions are revealed over the years; he’s counting down the days to his father’s death so he can sell the house and make money. Despite Alex’s change of heart, he cannot take back the home. Had Alex placed the home into a trust instead, he could have executed a will disinheriting Jason from his estate and input new beneficiaries in his place.
- Another very important issue to consider is whether the person you are transferring the deed to is a recipient of government benefits, ie Medicaid, SSI, Disability. If so, the transfer is counter productive since it may have the effect of rendering the person ineligible for future benefits and further subjecting the property to Medicaid estate lien recovery.
The contrast between a trust and a life estate deed is a good example why you should consult with a trust estate lawyer. If your grand strategy is to protect your assets in order to provide for yourself and your loved ones, then the first step is to contact an estate planning lawyer and discuss available options. Call us for a free consultation at 646-233-0826, or send an email to firstname.lastname@example.org.
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