Life Estate Deeds:
A Way to Save the Home
I do a large number of life estate deeds to solve a problem. Here is a typical example of a problem. Let’s say Mrs. Smith, a widow, has lived alone in her home and now needs to enter a nursing home because of her significant mental and/or physical impairments. She applies for MassHealth (Medicaid) benefits to pay the nursing home bill and immediately qualifies to receive these benefits because she has less than $2,000 and owns her own home. Her home is non-countable, so MassHealth cannot force its sale until she passes away.
At her death, her estate must be probated so legal title in the home can pass from Mrs. Smith to her three children. In the probate court process, we must notify the Estate Recovery Unit (“ERU”) of Mrs. Smith’s death. ERU checks its database. In this case, records reflect that Mrs. Smith owes MassHealth $240,000, the money paid by MassHealth for Mrs. Smith’s nursing home care. ERU demands payment of the full $240,000, forcing the sale of the home. If Mrs. Smith’s home sells for less than the amount owed to ERU, ERU receives the entire sale proceeds and walks away without having been paid in full. If Mrs. Smith’s home sells for more than the $240,000, ERU is paid in full and Mrs. Smith’s three children divide the remaining proceeds from the sale of Mrs. Smith’s home. Usually, the debt owed to ERU swallows up the entire house.
A life estate deed can save the house. Here is how it works. Let’s paint a different picture. Let’s now say that more than five years before Mrs. Smith entered the nursing home and applied for MassHealth benefits, she signed a life estate deed giving the remainder interest to her three children, retaining a life estate interest in her home. A remainder interest means that upon Mrs. Smith’s death, her three children automatically own Mrs. Smith’s home, without having to probate the house. ERU has no mechanism to force the sale of the house which is now owned by Mrs. Smith’s three children.
When Mrs. Smith signs the life estate deed, she is giving a gift of the remainder interest to her children. This gift, like all gifts made within the five-year period prior to the date of the MassHealth application, must be returned to Mrs. Smith. This is called the “five-year look-back.” This is why it is better to sign a life estate deed sooner rather than later.
The life estate interest retained by Mrs. Smith is a true property interest owned fully by Mrs. Smith as long as she is alive. Mrs. Smith remains responsible to pay the real property taxes, homeowner’s insurance, and for the upkeep of her home. Moreover, Mrs. Smith’s life estate interest prevents a child, a remainderman, from evicting her. (Believe it or not, sometimes a child says that to a parent.). She continues to own her life estate interest until she passes away.
Sometimes the life estate interest, or the entire home, is sold before the death of the life estate owner. When this happens, the sale must be carefully considered because the remaindermen might have to pay capital gains taxes. I help my clients step through this issue.
Another way to save the home is to purchase long-term care insurance that provides benefits of no less than $125 per day for a period of no less than two years at a skilled nursing home. Unfortunately, most people are unable to afford this insurance or fail to medically qualify.
Life estate deeds are a simple and affordable way to save the home. I cover this and many other topics in my series of classes at Holyoke Community College.