In a previous article we explained that using an irrevocable trust can be the best way to preserve the family homestead for future generations.   The maker of the trust typically arranges to continue to live in the property and pay the expenses as long as he or she desires.  If it occurs at least five years before an application to the Department of Human Services (DHS) for Medical Assistance (MA or Medicaid) to pay for nursing home care, a transfer of home ownership to a trust will not have a negative effect on MA eligibility.

Equally important, the trust offers protection for the intended heirs, who are usually but not necessarily the children. For example, a home that is owned in a trust can be protected from divorce, bankruptcy and creditor actions involving any of the heirs. This can limit the spillover effect of a negative event in the life of one heir from creating a liability or loss for the other heirs.

An alternative to a trust is to consider the use of a life estate. Creating a life estate involves using a special form of a deed instead of a trust.  The concept is simple, but only on the surface.  Essentially, the grantor of a life estate conveys a property to another party, reserving the right to live in the property until the death of the grantor.

Historically, a life estate has occasionally been used in conventional real estate transactions between unrelated parties. An example is when an investor buys a tract of land that the owner is not using, but is attached to the house where the owner intends to reside for the remainder of his or her life.  Such a transaction allows the aging owner to receive a windfall of cash for excess property, while remaining in the home as a “life tenant”.  The excess property conveys automatically upon the death of the homeowner to the investor, who is called the “remainderman.”

The life estate technique can work to preserve family property in a similar manner; however it lacks the features of protection from creditors provided by ownership in a trust.   Future possible complications need to be considered  when more than one child is named in a deed as a remainder owner. The remainder owners will eventually take title either as “joint tenants with right of survivorship” or as “tenants in common.”

If the remainder owners are joint tenants with right of survivorship, selling the property interest requires the consent of all owners. The value of the property is usually safe from a non-owner’s demands during a divorce or lawsuit.  Upon the death of a joint owner, the property interest goes to the other joint owners and cannot be carved out for other preferred heirs.

If the remainder interest is titled as tenants in common, then such an interest can be accessed by a lien during a divorce or lawsuit. It may be freely sold to a third party, or left to an heir as part of an estate.  In most instances, this can lead to surprising complications for the other remainder owners.

Whether the life estate is conveyed by gift or by sale matters. If the parent gives away the remainder interest within five years of applying to DHS for Medical Assistance to pay for nursing home care, a penalty period may be enforced during which the recipient of the gift may need to find a way to pay privately for the cost of nursing care for the parent.  Whether by a sale or gift, the fair values of a life tenant interest and the remainder interest are percentages of the fair market value at the time the deed is created, which when added together will equal 100%. Ownership percentages in Pennsylvania are determined by the Department of Revenue, which bases its assessment on information from the federal Internal Revenue Service.

When a life estate is created, complications can occur if either the life tenant or the remainderman needs to use the home as collateral for a loan, changes their mind and no longer wants to live in or own the property in the future, or lacks the ability to maintain the property. Some of these snags have relatively easy legal solutions, if all parties are agreeable to accommodate each other’s needs.  Other snags become Gordian knots, which is why a life estate is not a common solution which works for every family.

Perhaps you have heard of a parent buying a life estate in a child’s property, and wonder why that can be a good idea.   Simply put, giving a child a large sum of cash for the right to live in their home for the rest of your life can be a way around the five-year-lookback for Medicaid.  However, for this to work for asset protection, the parent must actually live in the child’s home as a primary residence for at least twelve months after giving the child money before going to a nursing home.

How much money may be given to the child in relation to a life estate transaction depends on the age of the parent. As an example, an 83 year old may pay one third of the home’s value, which is a bit less than an 82 year old may pay, and a bit more than an 84 year old would pay.  Such life expectancy estimates are published in tables, not unlike tax tables, and are gender neutral and without regard to the actual health of the life tenant.

Use of a life estate technique can be coupled with a family caregiver agreement to transfer more assets to a family member if care is being provided, as is often the case.   Occasionally, these types of family arrangements create jealousy or animosity among siblings, especially if the “Blacksheep” sibling seems mostly interested in making sure that the parent does not squander an inheritance, to which Blacksheep feels unjustly entitled.  Wise legal counseling should anticipate and prepare for this situation.

by Dave D. Nesbit, Attorney

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