Is a Life Estate Right For You?

Life Estate Deeds and Medicaid

Life estate deeds are sometimes used in Medicaid planning because Medicaid cannot put a lien on the house for the cost of services rendered and cannot recover after death because it avoids probate. Note that for Medicaid coverage in a nursing home, this full protection is only available five years after the life estate deed is signed.

What are the Disadvantages Of a Life Estate Deed?

You may ask, is there a downside? For one, the transfer of ownership in a life estate deed is irrevocable. Once a deed is signed, the life estate and remainder interests are binding. To remove or modify a life estate, the remaindermen would have to give back their interest.

Another potential downside is that a life tenant cannot unilaterally sell, mortgage, or transfer the property. If the life tenant or remainderman wants to sell, they must agree. The distribution of sale profits to which the life tenant is entitled is determined by the life tenant’s age and the current market value of the property, using actuarial tables or formulas provided by the IRS. Interestingly, life tenants can transfer their interest to someone else during their life, but the new life tenant is limited to the lifespan of the original life tenant.

Life Estate Deed vs. Trust: Which is Better?

It is often advisable to place the entire property in a trust instead of merely using a life estate deed. Using a trust can allow you to change the beneficiaries and even change who is the trustee of the trust.  On the Medicaid front, putting the property in an irrevocable trust will give complete protection to the property in the event it is sold during your lifetime because the entirety of the proceeds will remain protected in the trust rather than paying out to the life tenant in their individual name.

While a life estate deed is one of the tools in the estate planner’s belt, it is not the answer for everyone. As with any planning, the best option will depend on the goals, concerns and people involved. An attorney versed in estate planning can help you decide if a life estate deed is the right addition to your estate plan.

By Britt Burner, Esq. and Erin Cullen, Esq.

Britt Burner, Esq. is a Managing Partner, and Erin Cullen, Esq. is an Associate Attorney at Burner Prudenti Law, P.C. Burner Prudenti Law, P.C. serves clients from New York City to the east end of Long Island with offices located in East Setauket, Westhampton Beach, Manhattan, and East Hampton.