If I had to list the most frequently discussed topics that I have with my clients, protecting a home from the ravages of long-term care costs would be very high on that list. I’ve written about this topic several times in the past, but I thought the topic deserved a fresh discussion.
A common Medicaid planning technique for the home involves the parent gifting an interest in her home to her children while retaining for the parent a right to live in the home for the remainder of her life. For many attorneys, the interest that the parent retains is a full-fledged life estate.
A life estate is a property ownership interest. With a life estate, the parent is entitled to all of the rental income that the property might produce and is entitled to a portion of the proceeds of sale if the home is ever sold. Essentially, a life estate retains for the parent all of the benefits that a full-owner might have in the property for the remainder of the parent’s life. Only after the parent dies will the children–who are called the “remaindermen”–be entitled to any of the benefits of ownership.
I have used life estate interests frequently, and most elder law attorneys continue to use life estates. While I still believe that life estates offer an excellent planning opportunity, other interests in real estate might be more suitable to the client’s needs.
In many cases, I like to structure the gift of a home as follows: The parent retains a life tenancy in the property. A life tenancy differs from a life estate in that the tenancy interest is personal to the parent. The parent is not entitled to rental income if the property is rented and is not entitled to any of the proceeds of sale if the home is sold.
In my opinion, it is often a bad idea for the parent to retain a full-fledged life estate, which entitles the parent to the rental income and to the proceeds of sale. Assume that Mrs. Smith transfers her home to her children and retains a life estate for herself. Mrs. Smith intends to live in her home for the remainder of her life. She has already lived there for thirty years, and in her words, “they’ll have to take me out of here feet first.”
Assume that ten years after Mrs. Smith transfers her home retaining a life estate, she enters a nursing home. Mrs. Smith’s children don’t have Mrs. Smith’s affection for her home and they want to sell her now-vacant home.
The problem is, since Mrs. Smith has a life estate, she is entitled to a large portion of the proceeds of sale if the house were sole, anywhere from 25% to 50% depending upon her age at the time. The younger Mrs. Smith is, the more her life estate is worth because the more expected life she has according to actuarial tables.
If Mrs. Smith were to receive 50% of the proceeds of sale, the money would go to pay the nursing home, which is precisely what Mrs. Smith was trying to avoid by transferring her house to her children. Furthermore, if the children rented the house, Mrs. Smith, not the children, would be entitled to the rental income, if Mrs. Smith retained a full-fledged life estate.
For this reason, I often suggest that Mrs. Smith retain life rights, only, specifically excluding any right to the proceeds of sale or rental income from the rights that she retains in the transfer.I also frequently suggest that the remainder of the home be transferred to an irrevocable trust. The trust protects the home from the children’s potential personal problems such as lawsuit, divorce, and death.
Mrs. Smith retains the use of her home for living purposes while protecting the home from potential long-term care costs. Since Mrs. Smith intended on living in the home for the remainder of her life and never intended on selling it, her retained life tenancy interest is all she really needs. Yet, the structure of the gift could prove beneficial if future circumstances don’t evolve as Mrs. Smith would hope.
John W. Callinan is a certified elder law attorney (as certified by the National Elder Law Foundation, accredited by the American Bar Association) with offices located in Middletown. He can be reached at 732-706-8008 or www.eldercarelawyer.com
