Most people's most important asset is their home, and protecting it is always a priority. In your retirement, though, the threat of huge, unexpected medical bills is always present, and expenses like long-term care — which Medicare and other regular health insurance plans typically don't cover — can quickly wipe out your assets. To protect your home, some advisors recommend using what's known as a life estate.
Motley Fool’s recent article, titled “What a Life Estate Is And How It Could Save Your Home,” tells us about life estates.
A life estate gives an individual the right to a home or other real property throughout that person's life. The life estate holder can live in the home, rent it out and keep the proceeds. The life estate holder has to pay the ordinary costs of maintaining the home, like property taxes. When the life estate holder dies, the property then goes to the holder of the remainder interest, who automatically receives full legal title and possession of the property without going through probate.
The article explains that to create a life estate, the owner of the property can execute a deed that retains a life estate interest but gives the remainder interest to another person or group. Many use a life estate to safeguard the family home from creditors, especially Medicaid. The rules of Medicaid don’t require you to sell the family home, but Medicaid puts a lien on the home. After the original owner dies, Medicaid is entitled to collect against that lien, forcing the sale of the home if necessary in order to collect that money. But if you create the life estate at least five years beforehand, Medicaid's anti-transfer rules typically don’t apply.
However, life estates do present some challenges, such as the fact that the creation of the life estate is treated as a gift to the remainder interest holder, which may mean gift tax liability. Also, the life estate holder can't sell the property without the permission of the holders of the remainder interest. The proceeds of a sale have to be divided according to the relative value of the life estate and remainder interests.
Legal concepts like life estates can be difficult to understand. Talk to an estate planning attorney about this way to preserve a family home. A life estate may not make sense for everyone, but they can be useful in the right situations for those who understand all of the factors involved.
Reference: Motley Fool (June 8, 2015) “What a Life Estate Is And How It Could Save Your Home”