Save Your Home With A Life Estate

Home is where the heart is. The thought of losing your home can be devastating. What options do you have to prevent this from happening?

A life estate is one option.

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.

Life estate holder’s role

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.

Creating a life estate

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, as described in a recent Motley Fool article.

Many uses 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.

Challenges of life estates

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 “What a Life Estate Is And How It Could Save Your Home”