As we age, many of us begin to worry about the cost of long-term care. The cost of a skilled nursing facility or nursing home in Western Massachusetts can range from $10,000 to $15,000 per month. It is quite difficult to protect all of one’s assets from such costs, but there is a fairly common strategy to protect your home, often your most valuable asset. The strategy: a deed with a life estate.
This method of asset protection involves naming one or more of your adult children on the deed to your home, while reserving a life estate for you. This new deed is then recorded at the Registry of Deeds. That life estate interest means that you may continue to live in your home for your lifetime and you continue to pay all expenses related to the property. It is a present interest in the property because you benefit from that interest immediately. Your children own a future, or remainder interest in the property. Once you record such a deed, you should add your children to your homeowner’s insurance policy, so that they are covered as additional owners.
What are the advantages of such a deed?
- First, the property will not have to be probated upon your death, because your children will, at the moment of your death, own a present interest in the house.
- Second, when you die, the entire value of the home will be included in your gross estate for estate tax purposes. While that might sound like a disadvantage, it benefits your children. They will, as a result, own the home at its date-of-death value, or the stepped-up basis. If they sell the property soon after your death, they will likely not be liable for any capital gains tax, despite the property not being their primary residence.
- Third, harkening back to those nursing home worries, a conveyance such as this begins the so-called “five-year lookback clock” for Medicaid/MassHealth purposes. After five years from the date of the deed, so long as the property is not sold, the value of the home will not be counted as an asset of yours when determining your financial eligibility for Medicaid/MassHealth.
What are the disadvantages of a deed with a life estate?
- First, you will no longer have total control over your home. In the event you want to take out a mortgage or line of credit, or sell the property, all owners, including your children, must agree.
- Second, by adding additional owners to your home you increase the pool of potential creditors against that asset. If one of your children gets divorced, is sued, or declares bankruptcy, their interest in your home may be reachable by such a creditor.
- Third, if you decide to sell your home, your children may be subject to capital gains tax if it is not their primary residence.
- Fourth, the naming of certain children on your deed may result in a distribution of assets that does not align with the provisions of your Will or Trust.
Other important considerations:
At your death, regardless of whether your assets exceed the Massachusetts estate tax threshold (currently, $1 million), the Commonwealth places a lien on any real estate you own. This can only be released by the filing of an estate tax return if you are over that threshold, or the recording of an affidavit of no tax in the event the assets are below the threshold. One of these two steps must be completed in order to provide clear title so that your children can sell the house in the future.
With regard to Medicaid/MassHealth, if you do become eligible for coverage, Medicaid may place a lien on the property for the value of the services provided to you. That lien is capped at the value of your life interest. On your death, your life interest has zero value, and so Medicaid is entitled to no reimbursement for the cost of those services. If, however, you sell the home during your life after having become eligible for Medicaid, the Commonwealth must be reimbursed for those services. The value of your life interest is predetermined based on the value of the home, your age, and current interest rates. The rules around Medicaid change often, so it is imperative to consult with an attorney with specialized knowledge before undertaking this approach.
Indeed, pun intended, pursuing this strategy involves many nuanced considerations. Despite the list of disadvantages of such a method, there are ways to mitigate the downsides. A deed with a life estate is a common tool used to avoid probate, achieve tax benefits, and protect a valuable asset, but one that should be undertaken with the guidance of a qualified estate planning attorney working on your behalf.
(Note: The facts presented in this article are based on Massachusetts law as it exists in July of 2022.)