Often an elder law attorney will suggest that clients transfer their home to their children, retaining a "life estate." What does that mean, and what are the consequences of such an arrangement?
When a person signs a deed to their home to their children, the children immediately own the house and the parents no longer own any interest in the house. Thus, the parents are at the mercy of the children, who could legally boot them out of the house at any time.
"My children would never do that to us!" you say. Maybe not, but one of more of your children could be sued, divorced or go bankrupt in a bad business deal. Since the children now own the house and not you, those creditors could attach "your" house and force a sale, leaving you out on the street.
Often a better solution is to deed the house to the children but retain the right to live in the house for the rest of your life, so that your children only own it upon your death (or, if you're married, following the death of the survivor of you and your spouse). Such a deed gives your children a "remainder interest" in the house, while you have retained a "life estate" in the house.
Since your children have no rights to the house during your lifetime, a divorce or lawsuit against a child cannot have any impact on your continued right to use and possess your house.
Upon your death (or, if you're married, upon the death of the survivor of you and your spouse), the house is immediately and automatically owned by your children. No probate is required to transfer ownership to them at that point. As a matter of fact, even if your will attempted to leave the house to someone else, the will would be ignored, since you've already given the house to your children by way of the deed.
For Medicaid purposes, deeding a remainder interest to one or more children may have the beneficial effect of protecting it against "estate recovery," i.e., the state's claim following your death for reimbursement of any Medicaid expenses it paid on your behalf during your lifetime. The rule in most states is that only assets in one's "probate estate" can be subject to estate recovery. So if the house passes automatically to the children outside of your probate estate at your death, then the state is out of luck.
If you deed your house to your children, and the house is worth $250,000, you just made a gift of $250,000 to the children when you signed the deed. However, if you deed only a remainder interest to your children, then you have made a smaller gift. After all, you have retained the right to use and possess the house for the rest of your life; that has a value. The federal government publishes a table that shows the value of a life estate at ages from 0 to 109; the Medicaid folks rely on this when valuing your life estate.
For example, if you are age 70 and sign a life estate deed, your retained interest in your house is valued at 61% and the gift of the remainder interest is valued at 39%. If you are age 80, you are not expected to live as long as a 70-year-old, so your retained interest is worth less (44%) which increases the gift value (56%).
So if your house is worth $250,000, and you are age 80 when you sign the life estate deed, you just made a gift of $140,000 ($250,000 x 56%). Such a gift will be counted against you if you apply for Medicaid within five years, so do your planning well in advance!
K. Gabriel Heiser is an attorney with over 25 years experience in elder law and estate planning. Heiser is the author of “How to Protect Your Family's Assets from Devastating Nursing Home Costs: Medicaid Secrets,” an annually updated practical guide for the layperson. For more information about this book, visit Medicaid Secrets.
We'd love to hear your questions, comments or opinions. Submit them here and other visitors can read them and comment on them. An e-mail address is not required.
Click below to see contributions from other visitors to this page...
An estate being sued by Medicad
If a person goes into a nursing home and medicaid is applied for, but the resident passes away before the medicaid is approved, is it true that the persons …
Sibling Home Ownership Rights and Medicaid Repayment Question
(NY) Life Estate holder passes away..who owns the home now? My Dad wrote a will in 1987 leaving his home to his 4 children (me & 3 siblings). In Aug …
Does the $13,000 Gift Tax Exemption apply to Medicaid? | Medicaid and Community Spouse Assets | Planning For Medicaid Coverage | Effect of Life Insurance Proceeds On Medicaid Eligibility | New Medicaid Annuity Rule Explained | How Can an Irrevocable Trust Be Used in Medicaid Planning? | Selling the House and Medicaid Qualification | How To Qualify For Medicaid If My House Is Worth More Than $500,000 | What is Elder Law? | Living Trust and Medicaid | What Is An Inheritor's Trust? | Should I Take Out a Loan Against My House to Pay For A Nursing Home? | Can I Give My House to My Child and Qualify for Medicaid? | Elder Care Lawyer Fees | Choosing A Nursing Home | Do I Need a Will? | Capacity To Sign a Will, Trust or Power of Attorney | Second Marriage Will Issues | Special Needs Trust Issues | What is a Common Law Marriage? | What is a Medicaid Annuity? | How does a Medicaid Annuity Work? | How To Protect My Home and Still Qualify for Medicaid | Medicaid and Spousal Will Election | Do It Yourself Medicaid Planning | Medicaid Rules and Reverse Mortgages | How Does Life Insurance Policy Ownership Affect Medicaid Eligibility? | Medicaid Estate Recovery Rules | Medicaid Estate Recovery Planning | Limitations on Medicaid Estate Recovery | Do Medicaid Plans Work? | Nursing Home Costs and Payment Options | Don't Be Too Cheap! | What Happens to My Home If I Go On Medicaid? | Can Spouse Receiving Medicaid Pay Income to Community Spouse? | Will Medicaid Exempt My Home If I Leave It? | Tips for Discussing Wills and Powers of Attorney With Your Parents | Elderly Marriage Issues | Durable Power of Attorney Medicaid Considerations |
From Medicaid Planning: Life Estate in House to Medicaid Questions | Estate Planning Blog | Basics of Estate Planning | Selecting a Financial Planner | Estate Planning and Taxes | Is This Good Time to Buy a House? | Incorporate My Business | Best Low Cost Investment | Fringe Benefit Plans | Estate Planning and Charitable Giving | Health Insurance Comparisons | Best Medicare Supplement Plan | Retirement and Estate Planning | What is a Power of Attorney? | Current Estate Planning News | Estate Planning Forum | Estate Planning Books | Choosing an Estate Planning Attorney | Find a Probate Attorney | Estate Planning Questions |
|--by Beth Heikkinen|
|I just want to thank you for this site. It answered my questions. I think many people that do research on the net take it for granted and when they find what they are looking for they forget "someone put time, money, etc into providing me with this information."|