Clients are often interested in doing a life estate deed as part of their estate plan. What is a life estate deed? It is one where the owner of the real property transfers the property to his or her children (or other family members), reserving the right to reside in the real property for the rest of his/her life. What are the advantages of doing this? One is that by doing a life estate deed there is no need to probate one’s will through the courts upon death. Almost all other assets can name beneficiaries, thus avoiding probate. It is usually the home that causes the problem. A second reason for doing a life estate deed is to remove the ownership so that if the person who owns the property needs nursing home or other long-term care, the real property will not be considered an asset since he/she no longer owns it. Lastly, it is relatively easy and inexpensive to change one’s deed to have a life estate.
What are the disadvantages of doing so? There are many. For one, the person or persons who you convey the real property to becomes an owner of the property, so that if he or she gets divorced or sued, the property is at risk. If the new owner passes away, it is also a problem unless the new owner has made provision for the real property in his or her will or trust. Also, if the person gifting the property should want to sell it, that person would need the permission of the new owner. The capital gains tax consequences of a sale while the former owner is alive can be devastating, as the capital gains tax exclusion is only available to an owner who uses the property as his or her primary residence. Additionally, if the former owner is receiving Medicaid assistance, the government will deem that former owner as owning a portion of the proceeds of the sale, thus jeopardizing Medicaid eligibility.
What is an alternative to a life estate deed? The proper way to avoid probate and/or protect the home from long-term care costs is to have the property transferred to a revocable or irrevocable trust, depending on one’s goals.