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Retained Life Estate

Holland, MA |
Attorney answers 3

Posted

Depends what your goal is. Nothing is good in the abstract. So please resubmit or add information. What is the purpose, what is the property, is it in trust now? Etc. But here are a couple of thoughts, and if they are enough for you, my recommendation is that you contact a local wills/estates/trust attorney who can help you.

Let's say we're talking the family home and you are a widower in your 70's, with an adult child who lives out of state with a wife and 2 children of his own, and you have a modest retirement income, medicare with private supplements and the remainder of your "estate" is modest. Let's say the goal is to preserve as much of your "estate" as possible to pass along for the sake of the grandchildren.

Let's say as you age your health begins to fail and you eat through everything except your home, and need nursing home care. If you still then own the home, and otherwise qualify for medicaid, you will lose the home unless your child buys it from you for fair market value.

One way to soften this blow would be to find a way to divest yourself of as much of your estate as possible now. There are gift exemptions available to you that you could give away value annually. Now you say you think you want to retain a life estate. The issue is valuation. Because just like the scenario above, at the time you need to apply for medicaid, the life estate has value -- perhaps less so, but valuation remains an issue, and your child may have to acquire it for fair market value or the home could be at issue. If you're not careful in terms of the gift-giving, however, you can create a gift tax issue or issues.

Also, as long as you retain any kind of ownership, of course other creditors can get to your assets and even though the dollar value of the retained life estate maybe negligible, a creditor seeking to shake some settlement dollars loose from you will have no hesitation to attempt to take the home from you to sell to satisfy the debt.

The pro is that you retain ownership of sorts, knowing it is "yours" and can give a sense of retained control and peace of mind. The other (perhaps obvious) positive is that as an owner you can borrow against the equity, but depending on how a lender views the value of the life estate, the lender will most likely want your child to sign the mortgage too so that as though it was in joint tenancy, ALL owners subject the home to the mortgage lien. Beware that some geriatrics "play" with their assets toward end of life and creat havoc for their descendents.

Posted

Depends what your goal is. Nothing is good in the abstract. So please resubmit or add information. What is the purpose, what is the property, is it in trust now? Etc. But here are a couple of thoughts, and if they are enough for you, my recommendation is that you contact a local wills/estates/trust attorney who can help you.

Let's say we're talking the family home and you are a widower in your 70's, with an adult child who lives out of state with a wife and 2 children of his own, and you have a modest retirement income, medicare with private supplements and the remainder of your "estate" is modest. Let's say the goal is to preserve as much of your "estate" as possible to pass along for the sake of the grandchildren.

Let's say as you age your health begins to fail and you eat through everything except your home, and need nursing home care. If you still then own the home, and otherwise qualify for medicaid, you will lose the home unless your child buys it from you for fair market value.

One way to soften this blow would be to find a way to divest yourself of as much of your estate as possible now. There are gift exemptions available to you that you could give away value annually. Now you say you think you want to retain a life estate. The issue is valuation. Because just like the scenario above, at the time you need to apply for medicaid, the life estate has value -- perhaps less so, but valuation remains an issue, and your child may have to acquire it for fair market value or the home could be at issue. If you're not careful in terms of the gift-giving, however, you can create a gift tax issue or issues.

Also, as long as you retain any kind of ownership, of course other creditors can get to your assets and even though the dollar value of the retained life estate maybe negligible, a creditor seeking to shake some settlement dollars loose from you will have no hesitation to attempt to take the home from you to sell to satisfy the debt.

The pro is that you retain ownership of sorts, knowing it is "yours" and can give a sense of retained control and peace of mind. The other (perhaps obvious) positive is that as an owner you can borrow against the equity, but depending on how a lender views the value of the life estate, the lender will most likely want your child to sign the mortgage too so that as though it was in joint tenancy, ALL owners subject the home to the mortgage lien. Beware that some geriatrics "play" with their assets toward end of life and creat havoc for their descendents.

The response given is not intended to create, nor does it create an ongoing duty to respond to questions. The response does not form an attorney-client relationship, nor is it intended to be anything other than the educated opinion of the author. It should not be relied upon as legal advice. The response given is based upon the limited facts provided by the person asking the question. To the extent additional or different facts exist, the response might possibly change. Attorney is licensed to practice law only in the State of Illinois. Responses are based solely on Illinois law unless stated otherwise.

Posted

Transferring ownership of property can expose the property to the liens and creditors of all the Remainder Persons. Example: Mom and Dad decided to transfer ownership of their home to their daughter and son-in-law, while retaining a Life Estate for themselves. Unfortunately, Son-in-law had financial problems and he filed Bankruptcy. Mom & Dad's house became an asset in Son-in-Law's Bankruptcy case.

Disadvantage of Life Estates #2: Transferring an ownership interest may disqualify you from part or all of the capital gains tax exclusion on the sale of a personal residence, and cause unnecessary income tax liability if the residence is sold during your lifetime.

See: http://estateplansplus.com/html/avoiding_probate_cases.html

On the positive side, a life estate - remainder arrangement can avoid probate. Also, under certain circumstances, a life estate transfer complete 5 years before a nursing home admission can avoid medicaid disqualification.

http://masshealthhelp.com/html/medicaid.html

Consult an elder law attorney for counseling on the circumstances that are relevant in your case.

John L. Roberts, Elder Law, Estate Planning, Probate and Disability Law
Longmeadow, Massachusetts