After the life tenant passes away the property is transferred to the beneficiaries which are called “remaindermen”. The transfer is made without having the property go through probate court.
During the lifetime of the life tenant, the life tenant can’t mortgage the property without the remaindermen agreeing to the mortgage. Most banks will require the remaindermen to sign all mortgage documents.
Also, the life tenant is not allowed to sell the property without the remaindermen agreeing to the sale. If all of the life tenants and remaindermen agree to sell the property, the remaindermen would receive a portion money from the sale. Please note the amount that the life tenant will receive from the sale has difference values depending on why they are selling the property. If the life tenant is concerned about Title 19 (Medicaid for the Nursing Home), the Medicaid life tenant table requires the life tenant to take a greater value then the IRS requires on the IRS’s life tenant table. It is very important to determine how to split of the proceeds from the sale of the property because it will affect all parties differently, under the Medicaid and the IRS tables.
Life estate may be a valuable tool in both estate planning and Medicaid planning. For estate planning the property will avoid probate and will avoid capital gains if it is transferred at the life tenant’s death and not sold during their life time. For taxes purposes, the remaindermen will take the property at the value of property at the date of death of the life tenant. The remaindermen will not take it at the value the life tenant purchased the property and will receive the step-up in basis. This means the remaindermen will not pay capital gains taxes on the property when they become owners. However, the basis of the property at the time they became owners and the value of the property when they sell it could cause them to pay capital gains or receive a loss.
For Medicaid purposes, a life estate may protect up to 100% of the value of the property from a Medicaid lien or spend down. If the life tenant gifted the property away before August 1, 2014 and the life tenant did not apply for Medicaid for 5 years from the date of transfer, it would be 100% protected from a Medicaid lien or a spenddown. The 5-years is known as the 5 year look back period where if you gifted away any assets for less than fair market value it is considered a divestment and you may not qualify for Medicaid. If you created a life estate after August 1, 2014 and made it pass the same 5-years look-back without applying for Medicaid then a portion of the value of your property would be protect. Medicaid may still put a lien on the property for a portion of the value that the life tenant is entitled too. The amount is based off of Medicaid table, which calculates the lien based on the life tenant’s age and the value of the property.
There are always problems with everything in life and that is true with life estates. I already mentioned that a life tenant can’t sell the property or take out a mortgage on the property without permission of the remaindermen. Some additional problems are related to the remaindermen’s interest. Because the remaindermen have an interest in the property, if the remaindermen go through a divorce, personal injury, court case, or bankruptcy a lien could be placed on the property. The creditor will not be allowed to force a sale of the property because the life tenant still has a right to use the property until they pass away. Also, that means the creditor can’t not enforce the lien until the life tenant passes away.
Another problem arises when the life tenant is in the nursing home and on Medicaid. If the life tenant is single then their assets are at $2,000.00. They probably do not have any money to pay the taxes, insurance, and the maintenance on the property. That means the remaindermen will need to pay those costs until the life tenant passes away. Do the remaindermen have the money to do that? Also, things like snowplowing and other yard work need to be taken care of. The remaindermen might not live in the area or have money to hire someone to do that. Other bills that need to be taken care of like water, electricity, and heat. It is never a good idea to leave a property vacant for any period of time. If the property is rented, the income from the rent must be given to the life tenant which could affect their Medicaid benefits. If the parties agree to sell the property while the life tenant is still alive, then the life tenant will need to receive some of the proceeds which could affect their Medicaid benefits. The sale during the life of the life tenant will also cause tax implications and the step-up value will be lost.
Life estate may be a very valuable tool in estate planning and Medicaid, but it may also cause problems if it is not done right. There are three very complex laws to consider: tax laws, Medicaid laws, and estate planning laws. It is always best to speak with a lawyer and an account who knows the laws before you create a life estate.