What Is a Life Estate?
In conversations about Medicaid and estate planning, the term "life estate" is frequently brought up, but what does it really mean? A life estate is a type of co-ownership that permits one owner to live in a home until their passing, at which point the other owner inherits it. Probate can be avoided and children can inherit a home without losing the right to occupy it by using life estates. They may also be very significant in Medicaid planning.
Who Has Ownership Over a Life Estate?
Two or more people each hold an ownership stake in a property for varying durations when there is a life estate. The life tenant, or the person with the life estate, is the one who owns the property for the duration of their lives. The remainderman, if there are multiple of them, is the other owner(s) with a present ownership interest; yet, he or she cannot take control of the property until the life estate holder passes away. During their lifetime, the life tenant has complete authority over the property and is legally obligated to maintain it. They also have the right to use, rent out, and make modifications to the property.
Does a Life Estate Go Through Probate?
The residence won't go through probate when the life tenant passes away because the holders of the residual interest will instantly inherit the property. In Colorado, the property can prevent Medicaid estate recovery following the death of the life tenant since it is not part of the life tenant's probate estate.
Without the remaindermen's consent, the life tenant is not permitted to mortgage or sell the property. If the child refuses to assist with the sale or sell the residence, this can occasionally become troublesome.
What Happens if a Life Estate is Sold?
The life tenant and the remaindermen split the proceeds if the property is sold. The life tenant's age at the time of the lease determines the shares; the older the tenant, the smaller their part and the higher the remaindermen's share. The proceeds from the sale go to the remaindermen and not their parents, so there might not be enough money left over to buy a new place to live.
Transferring a Life Estate and Medicaid
Be aware that transferring your property and retaining a life estate can trigger a Medicaid ineligibility period if you apply for Medicaid within five years after the transfer. Purchasing a life estate should not result in a transfer penalty if you buy a life estate in someone else’s home, pay an appropriate amount for the property, and live in the house for more than a year.
For example, an elderly man who can no longer live in his home might sell the home and use the proceeds to buy a home for himself and his son and daughter-in-law, with the father holding a life estate and the younger couple as the remaindermen. Alternatively, the father could purchase a life estate interest in the children’s existing home. Assuming the father lives in the home for more than a year and he paid fair value for the life estate, the purchase of the life estate should not be a disqualifying transfer for Medicaid.
Just be aware that there may be some local variations on how this is applied, so be sure to check with your attorney.
Call Skipton Law to learn more at (720) 770-3880 or use our online case review form to schedule a consultation.
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