By Nancy Burner, ESQ.

Many people who own real property, whether it is a family home or a vacation home, have a common estate planning goal: protect the house and transfer it to the next generation.

One way to transfer real property to your beneficiaries during your life is to execute a deed with a life estate. For the owner, this means that you will retain the right to live in the home until your death, but upon your demise, the property will be fully owned by your beneficiaries. Because you retained a lifetime interest in the property, you would still be able to claim any exemptions with respect to the property.

There are several benefits to executing a deed with a life estate. First, it is easy and relatively inexpensive. Because the property is a transfer, it will start the look-back period for Medicaid. For nursing home care, the transfer must be more than five years prior to your application for coverage. There is no look-back period for home care, so the property would be considered “unavailable” in the month after the transfer. Moreover, when you pass away, the beneficiaries will get a “step-up” in basis that will eliminate or lessen capital gains tax due if they did sell the property. 

However, the negative aspects to this kind of transfer typically outweigh its benefits. The first is loss of control. Once you have transferred the deed to your beneficiaries, they own it. If you wanted to sell the property or change who received it, you would have to get the permission of those to whom you initially transferred the property. If one of your beneficiaries dies before you, their estate will own a piece of your house. If their estate pays to their spouse, you could have in-laws owning your property when you would have preferred that share to go to the decedent’s children.

Lastly, if the property is sold during your lifetime, you may incur a capital gains tax. When a person sells their primary residence, they receive a $250,000.00 exemption, which means that a tax would only be imposed if the gain on the property was more than $250,000.00. However, when your ownership interest is a life estate, you do not get the full $250,000.00 and therefore may inadvertently incur a tax. For Medicaid purposes, if the house is sold, your interest in the property will be valued and what was once an exempt asset will convert to cash. If this cash amount plus what you already have exceeds the Medicaid asset limit, currently $14,850.00, you would be ineligible for Medicaid.

Another way to transfer real property at death is to create a last will and testament with specific provisions with respect to that property. For instance: “My Executor shall distribute my real property located at 1 Smith Street, Smithsville, New York, to my children, in equal shares.” This means that upon your death, your executor would probate your will in Surrogate’s Court and once they receive approval from the court, they could effectuate the transfer to your children as desired.

The benefit to this kind of planning is that you retain complete control over the property until your death. The downside is that it provides no asset protection and your beneficiaries would have to wait until the probate process is completed before they received the real property.

Moreover, any disinherited heirs would have the opportunity to object to your will. If you have children and are treating them equally, then this would not be a concern, but for those who are treating children unequally or for those who do not have children and are leaving property to a nonfamily member, a traditional will may not be the best option.

The last way to devise real property is through a trust. While there are many different types of trust, for the purposes of this article we can divide them into two categories: revocable vs. irrevocable trusts. A revocable trust allows the creator to maintain complete control over the property in the trust, whereas an irrevocable trust typically limits your access to the property and forces you to designate someone other than yourself (or your spouse) as the trustee. All trusts avoid the probate process. Similar to a will, the property would continue for your benefit during your life and would not transfer to the beneficiaries until after your death.

In addition to avoidance of probate, irrevocable Medicaid trusts protect the property in case you need Medicaid to cover the cost of long-term care in the future as transfers to irrevocable Medicaid trusts begin the five-year look-back period even though you maintain control over the asset. This control is in the form of the ability to change your trustee and your beneficiaries any time. The house can be sold at any time and a successor property purchased without incurring any negative tax consequences.

The biggest negative to the trust is the cost to set it up. Typically, attorneys charge more to prepare a trust than a simple will or deed transfer.

Nancy Burner, Esq. practices
elder law and estate planning from her East Setauket office.