Home is where the heart is. The thought of losing your home can be devastating. What options do you have to prevent this from happening?
Motley Fool’s recent article, titled “What a Life Estate Is And How It Could Save Your Home,” tells us about life estates.
A life estate gives an individual the right to a home or other real property throughout that person's life. The life estate holder can live in the home, or rent it out and keep the proceeds. The life estate holder has to pay the ordinary costs of maintaining the home, like property taxes. When the life estate holder dies, the property then goes to the holder of the remainder interest, who automatically receives full legal title and possession of the property without going through probate.
The article explains that to create a life estate, the owner of the property can execute a deed that retains a life estate interest but gives the remainder interest to another person or group. Many use a life estate to safeguard the family home from creditors, especially Medicaid, and particularly if the home is really the only asset that needs to be protected. If the owner of the home moves out to a nursing home, Medicaid will require the home be listed for sale within 6 months of qualifying for Medicaid, and if the home hasn’t sold, Medicaid can still put a lien on the home. After the original owner dies, Medicaid is entitled to collect against that lien when the home is sold. But if you create the life estate at least five years beforehand, Medicaid's anti-transfer rules typically don’t apply.
However, life estates do present some challenges, such as the fact that the creation of the life estate may be treated as a gift to the remainder interest holder, which may mean gift tax liability. Also, the life estate holder can't sell the property without the permission of the holders of the remainder interest. The proceeds of a sale have to be divided according to the relative value of the life estate and remainder interests. Also, life estates only protect the home, not any cash, investments, retirement accounts, or Whole Life insurance, to name just a few available assets.
Legal concepts like life estates can be difficult to understand. Talk to an estate planning attorney about this way to preserve a family home. A life estate may not make sense for everyone, but they can be useful in the right situations for those who understand all of the factors involved.
Reference: Motley Fool (June 8, 2015) “What a Life Estate Is And How It Could Save Your Home”