The ins and outs of life estates

The ins and outs of life estates

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By Linda M. Toga, ESQ.

The Facts:   My mother deeded her house to me and my brother Joe and retained a life estate.

The Question:  Can Joe and I sell the house to pay for our mother’s care?

The Answer:  You and your brother can sell the house but, only with your mother’s consent. Based upon her life estate, your mother has an ownership interest in the house for as long as she lives. As such, her consent is not only needed to sell the property but also to obtain a mortgage on the house or to otherwise encumber the property.

That being said, depending on your mother’s age and when she deeded the house to you and Joe, there may be better ways to finance your mother’s care than selling the house.

Before the Medicaid look-back period was changed to five years for all nonexempt transfers, life estates were a very popular part of Medicaid planning. However, since the look-back period is now the same whether you transfer a residence and retain a life estate or put the residence in an irrevocable trust, life estates create unique problems and, therefore, are less popular. 

That does not mean that there are no benefits to creating a life estate. For example, by creating a life estate, the house will not be subject to probate when your mother dies, the value of the house will not be included in your mother’s gross taxable estate and your mother continues to enjoy any real estate tax exemptions that were applicable to the property before she deeded the house to you and Joe.

The downside of a life estate from a Medicaid planning perspective is the fact that, if the house is sold during your mother’s lifetime, your mother is entitled to a portion of the proceeds from the sale. This is true even if the life estate was created more than five years before the sale.

The percentage of the proceeds going to your mother upon the sale of the house is governed by life expectancy tables, depends on how old your mother is at the time of the sale and is surprisingly large.

For example, a life tenant who is 80 years old at the time her $300,000 house is sold, is entitled to approximately $130,000 of the proceeds. In the context of a Medicaid application, that $130,000 will be deemed an available resource and may result in a denial of benefits.

Clearly, if you are concerned about paying for long-term care and considering Medicaid planning for your mother, it is important to consult with an experienced attorney before selling the real property that is subject to her life estate.

Linda M. Toga provides legal service in the areas of estate planning, estate administration, Medicaid planning, wills and trusts, marital agreements, small business services, real estate and litigation from her East Setauket office.