Is a Life Estate Deed a Good Idea for Passing A House to Your Children?

Life estates can be an excellent tool for Medicaid planning, probate avoidance and tax efficiency, but there are potential problems to look out for. Knowing the implications and risks of a life estate is essential in determining whether it is appropriate for your situation. 

parties executing a deedIn a life estate, two or more people each have an ownership interest in a property, but for different periods of time. The person holding the life estate -- the life tenant -- possesses the property during his or her life. The other owner -- the remainderman -- has a current ownership interest but cannot take possession until the death of the life estate holder. The life tenant has full control of the property during his or her lifetime and has the legal responsibility to maintain the property as well as the right to use it, rent it out, and make improvements to it.

the benefits of a life estate deed"Life estates are excellent planning techniques in many circumstances. They permit parents to pass ownership in their homes to their children while retaining absolute possession of the property during their lives. By executing a life estate deed, the property avoids probate at the parents' deaths, is protected from a Medicaid lien, and receives a step-up in tax basis."- Theodore Alatsas, Esq., Estate Planning Attorney in Brooklyn

Are There Potential Issues With a Life Estate Deed?

Simply put, there are potential issues that may arise with life estates and it’s important to fully understand the following risks:

  • Selling Mortgage Property- As a life tenant, you may not easily sell or mortgage property with a life estate interest. The remaindermen must all agree if you decide to sell or borrow against the property. One thing that can help is a testamentary power of appointment in the deed. This is a mechanism that permits the life tenants to change who ultimately receives the property by directing its disposition in their wills. It won’t allow the life tenant to sell the property, but it does give the life tenant more bargaining power with the remaindermen. Another option is a nominee realty trust. This type of trust permits one or more children to act as trustee or trustees for all the children, and provides that they must follow the direction of a majority of the beneficiaries. So, if there are four children and one child objects to the sale or mortgage of the property, but the other three are on board, the majority can direct the trustee to sign the papers necessary to facilitate the sale or borrowing.
  • After the Sell- If the property is sold, the remaindermen are entitled to a share of the proceeds equal to what their interest is determined to be at that time.
  • Name Change Difficulties- It is not as easy to remove or change a name once it is on a deed to real estate as it is to change the beneficiary on a life insurance policy or bank account.
  • The Remainderman- Once a remainderman is named on the deed to your house, he or she has an interest in the home and his or her legal problems could become yours. For example, if your child, who is a remainderman, is sued or owes taxes, a lien could be filed against your home. Your child’s interest in the home is not protected if he or she files for bankruptcy. If your child gets a divorce, his or her spouse could claim all or part of your child’s interest in your home. Should your child die before you do, the child’s estate would have to go through probate unless at least one other remainderman was listed as a joint tenant. However, while these claims may be made against the property, no one can kick you out of it during your life.
  • Medicaid- Giving away an interest in property could disqualify you from receiving assistance from Medicaid, should you require long-term care within five years of the transfer. In addition, if you and the remaindermen were to sell the property while you were in a nursing home, the state could have a claim against your share of the proceeds for payments it has made on your behalf, but the share of the proceeds allocated to your children would be protected.

As with most planning tools, a life estate can be very useful with valuable benefits, but it is not for everyone. In many cases, the potential problems outweigh the benefits. As the law in this area is complex, it’s important to talk to a lawyer who knows about this in-depth.

What are some options instead of a Life Estate Deed?

There are several potential options to use instead of a life estate deed in New York.  One such option is putting your house in a trust.  Whether the right trust for you is a revocable or irrevocable, depends on the overall goals of your estate plan, and may be impacted by the home's equity.  Placing the home in a trust results in an orderly transfer to your beneficiaries when you die, or at other times, depending on how you set up your trust.  When the house is in a trust, you can extend protections for yourself and your beneficiaries from creditors and claims, and maintain eligibility for medicaid.  Its important to review the options of using the right trust, and consulting with an experienced medicaid planning attorney will help you address the concerns of the five-year look back rule and medicaid estate recovery.

A new option in New York is a transfer on death deed.  While the title remains in your name, you can name beneficiaries to your home by setting them forth in a transfer on death deed.  This keeps the house from going into probate and avoids medicaid estate recovery.  While this may be the desired result, it may become unwieldy of your beneficiaires haven't reached an appropriate age, or if they have creditors of their own.  Discuss this benefits of this option when consulting with your estate planning attorney.

ted talks life estates, transfer on death deeds and trusts"While a life estate deed can accomplish some of your estate planning goals, it may not be a complete solution.  Among the planning choices available to homeowners are revocable and irrevocable trusts, and transfer on death deeds in New York.  These choices, when implemented properly, can provide for the orderly distribution of your home when you're gone, while at the same time protecting your home from the 5-year medicaid lookback or medicaid estate recovery.  When planning for what to do with your home, review all of the available options to make the right choice for you and your family."- Theodore Alatsas, Esq., Brooklyn Estate Planning Attorney

Schedule a Consultation Today with our New York Estate Planning Attorney

Alatsas Law Firm is conveniently located for residents of Brooklyn, Queens, and Staten Island. Our ground floor office is handicapped accessible with a subway stop and two bus lines nearby.

We know that dealing with legal issues affecting your family can be stressful, but we will proactively work to provide you with peace of mind as you move forward. If you’re in need of assistance with a divorce or family law concern, contact us today at 718-233-2903 to schedule a free, no-obligation initial consultation.  

Ted Alatsas
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Trusted Brooklyn, New York Family Law Attorney helping NY residents with Elder Law and Asset Protection
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