For many individuals and families, their home is both their largest and one of their most sentimental assets. As the cost of long-term care continues to rise, many people begin exploring options to help protect their home from being at risk for their future long-term care costs and preserve the property as part of their legacy. One planning tool that is commonly considered is a life estate deed.
A life estate deed allows a property owner to transfer an interest in their home to designated remainder beneficiaries, often children or a trust for the benefit of children, while retaining the right to continue living in and using the property during their lifetime. The person retaining those rights is referred to as the “life tenant,” while the individuals or trust receiving the remaining interest is referred to as the “remaindermen.”
Importantly, the life tenant does not give away the entire property interest. Instead, ownership is divided between the life tenant and the remainder beneficiaries based upon actuarial calculations tied to the life tenant’s age, as set by the Social Security Administration. Generally speaking, the older the life tenant becomes, their interest in the property by virtue of their life estate deceases and the remaindermen’s interest in the property increases.
Life estate deeds can offer several important planning advantages. First, upon the death of the life tenant, the property receives a full step-up in cost basis. This often eliminates or significantly reduces capital gains taxes if the property is later sold by the remaindermen.
Additionally, because the property passes automatically to the remainder beneficiaries, upon the death of the life tenant, the property avoids probate. This simplifies the transfer process to the remaindermen as a life estate is fully extinguished at death and, thus, not part of the life tenant’s estate.
Another significant benefit is that the life tenant generally continues to qualify for many of the tax advantages associated with home ownership. Depending on the circumstances, this may include eligibility for programs and deductions such as the ANCHOR Program, senior citizen deductions, and the continued ability to deduct real estate taxes for income tax purposes.
While life estate deeds can be an effective Medicaid and estate planning tool in certain situations, the legal, tax and Medicaid implications should be carefully evaluated before transferring any interest in real estate.
If you are interested in discussing whether a life estate deed may be appropriate for your situation, or if you would like to learn more about Medicaid planning options, please contact our office to schedule a consultation with one of our attorneys.
