Generally, A Life Estate is……
The phrase “life estate” often comes up in discussions of estate and Medicaid planning, but what exactly does it mean? Generally, a life estate is a form of joint ownership that allows one person to live in a house until his or her death, at which time it passes by operation of law to the surviving owner. Life estates are used to help fulfill various planning goals. An owner of a property can retain a life estate and give the remainder of the property away. Here are a few of the reasons our clients use life estates as a part of their planning:
- To cause a piece of real property to avoid probate.
- To give a house to children without giving up the ability to live in the house.
- To allow a surviving spouse from a second marriage to live in the marital home, while insuring that the property ultimately goes to the deceased spouse’s children.
- To allow a child to live in the property for the balance of his or her lifetime, while insuring that the property or proceeds from the sale of the property ultimately go to the other children or grandchildren.
- Life estates can also play an important role in Medicaid planning.
In a life estate, two or more people each have an ownership interest in a property, but for different periods of time. The person holding the life estate — the life tenant — possesses the property during his or her life. The other owner — the remainderman — has a current ownership interest but cannot take possession until the death of the life estate holder. The life tenant has full control of the property during his or her lifetime and has the legal responsibility to maintain the property as well as the right to use it, rent it out, and make improvements to it.
When the life tenant dies, the house will not go through probate, since at the life tenant’s death the ownership will pass automatically to the holders of the remainder interest. The property is not included in the life tenant’s probate estate therefore, it can avoid Medicaid Estate Recovery in states that have not expanded the definition of estate recovery to include non-probate assets. Even if the state does place a lien on the property to recoup Medicaid costs, the lien will be for the value of the life estate, not the full value of the property.
Life Estate Tax Considerations
Although the property will not be included in the probate estate, it will be included in the taxable estate. For real property owned in Pennsylvania, this is an important consideration. As a result of the life estate interest, the property value will be subject to PA Inheritance Tax upon the death of the life tenant. PA has varying tax rates depending on how the decedent is related to the person inheriting. Depending on the size of the estate and the estate tax threshold, the property may be subject to federal estate taxation. On the bright side, because the property is taxable in the life tenant’s estate, there should be a “step-up in basis” as of the deceased life tenant’s estate, thereby reducing or eliminating capital gains tax upon the sale.
Who Takes Care Of The Property
Typically, the life tenant is responsible for the upkeep, maintenance and taxes related to the property during the period he or she resides in the property. If the life tenant fails to properly care for the property or fails to pay the taxes, the remaindermen may have the power to force the life tenant to release his or her life interest. At that time, the remaindermen could either move into the property or sell the property as they desire.
Division of Proceeds Upon Sale Of Property
Typically, the life tenant cannot sell or mortgage the property without the agreement of the remaindermen. If the property is sold during the life tenant’s lifetime, the proceeds from the sale are either divided between the life tenant and the remaindermen or go solely to the remaindermen depending on how the life estate is written. If the life tenant is to receive a portion of the proceeds from the sale of the property, the shares are determined based on the life tenant’s age at the time — the older the life tenant, the smaller his or her share and the larger the share of the remaindermen.
Impact On Medicaid Qualification
Be aware that transferring your property and retaining a life estate can trigger a Medicaid ineligibility period if you apply for Medicaid within five years of the transfer. Purchasing a life estate should not result in a transfer penalty if you buy a life estate in someone else’s home, pay an appropriate amount for the property and live in the house for more than a year.
For example, an elderly man who can no longer live in his home might sell the home and use the proceeds to buy a home for himself and his son and daughter-in-law, with the father holding a life estate and the younger couple as the remaindermen. Alternatively, the father could purchase a life estate interest in the children’s existing home. Assuming the father lives in the home for more than a year and he paid a fair amount for the life estate the purchase of the life estate should not be a disqualifying transfer for Medicaid. Just be aware that there may be some local variations on how this is applied, so check with your attorney.
Hopefully this article has helped to answer some of your questions about Life Estates. The Life Estate is just one of the planning tools that we will utilize in a comprehensive Elder Law plan. Some of the other most common planning considerations are: Creation of Last Will & Testament, Creation of a Medicaid Asset Protection Trust, use of a Medicaid Compliant Immediate Annuity, qualification of the Family Caregiver Exception, creation of the Caregiver Agreement, Irrevocable Burial Reserve, Monthly Gifting Exception, Elder Law Friendly Financial Power of Attorney, Medical Power of Attorney, Living Will.
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For assistance developing a comprehensive estate plan or nursing home asset protection plan in Pennsylvania, please contact Douglas L. Kaune, Esquire at (610) 933-8069 or email him at dkaune@utbf.com. Doug’s entire practice is focused on Elder Law, Medicaid application, estate planning, trust planning, estate administration and protection of clients’ assets from nursing home spending and estate and inheritance taxation.
Unruh, Turner, Burke & Frees, P.C. is a full-service law firm which has three convenient office locations in Phoenixville, West Chester and Paoli, Pennsylvania. The firm primarily services clients in Chester, Montgomery, Delaware, Philadelphia, Bucks and Berks Counties, but can represent clients throughout Pennsylvania.
