Q: Is doing a deed with a life estate still a good planning tool to leave my property to my children?
A: A life estate can be a simple, cost-effective strategy to leave property to your children. However, there are several drawbacks that make a living trust a superior option.
A life estate is a type of joint ownership of real property. The “life tenant” retains the right to possess and use the property during their lifetime. Upon the life tenant's death, the remainderman (e.g. your children) takes full title to the property.
There are several advantages of retaining a life estate in property. The main benefit is that your beneficiaries, the remaindermen, take title without the need for probate, which reduces delays and costs. Further, the remainderman receive a full step-up in cost basis to date of death value, reducing potential capital gains taxes. Finally, Medicaid cannot place a lien on the property to recover the value of any benefits provided such as nursing home care.
A life estate is pretty straightforward to create by changing the deed. But a living trust, such as a Medicaid Asset Protection Trust (“MAPT”), offers several important benefits that a life estate cannot match.
When one transfers their home into a MAPT, they retain the right to live in the home and use the property just as with a life estate. However, the MAPT is a better vehicle to protect the asset for Medicaid purposes. If you need Medicaid long term care to pay for a nursing home within five years of the transfer, the deed will have to be transferred back to you. If your children refuse, then you will not qualify. Moreover, by transferring via deed, you also lose the $250,000 capital gains exemption if the property has to be sold during your lifetime. Most importantly, the property would be subject to your children's creditors and divorce.
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The decision between a life estate and MAPT can be difficult and involves the consideration of many factors. Thus, it is advisable to discuss the advantages and drawbacks of each option with an experienced estate planning attorney.
Dylan Stevens, Esq. is an attorney at Burner Law Group, P.C. focusing his practice areas on Estate Planning. Burner Law Group P.C. serves clients from Manhattan to the east end of Long Island with offices located in East Setauket, Westhampton Beach, New York City and East Hampton.