Life Estates In 5 Minutes

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Understanding life estates may be essential if protecting the home (or other real property) is an important goal. Getting the concept down, however, can be a bit confusing. Confusion be gone! Read on!

Falstaff

"Right, then! Another two of these and I'll be ready!"

Blame the English for our confusing real property law. I am convinced that the concepts involved in this article were invented in 1095 at Ye Whyte Horse on Thames Taverne four hours after closing time and some of the barristers had gotten a bit into their cups.

Lately, many have been asking about so-called “Lady Bird Deeds.” I’ll explain below . . . but you are going to have to read the whole article in order to understand.

First, take a look at other types of ownership . . . it might make understanding life estates easier.

Fee Simple

Most people think of real property ownership as fee simple. Someone with fee simple title completely owns the property. She can sell it, give it away, rent it, use it as security on a loan and do pretty much anything she wants with it (that isn’t otherwise illegal, of course). She is also responsible for paying the taxes on the property and any debts encumbering the property. The property is subject to the claims of her creditors. When the owner dies, the property passes through her estate (as directed by either a will or the state laws of intestacy).

Tenancy in Common

If two or more people own property the property is likely tenancy in common. Think of it something like a partnership among the owners. Each can use the property (unless they have a contract to the contrary). Each can sell his share, give it away, and use it as security for a loan. If one owner dies, his share passes as directed by his will or the laws of intestacy. Creditors can claim against his share. InGeorgia, a married couple is presumed to own property as tenants in common, although they can make other arrangements in a deed.

Joint Tenancy With Rights of Survivorship

This type of ownership might seem similar to tenancy in common, but it isn’t. Initially it looks like a tenancy in common, but if one owner

Lady Bird

"Hey. Bob will discuss Lady Bird deeds directly."

dies, the other owners take his share (divided among themselves). Sort of a “Last Man Standing” game because the property may end up completely owned (in fee simple) by the last surviving owner. Incidentally, in North Carolina, a married couple is presumed to own property as “tenants by the entireties” . . . which for purposes of this discussion acts the same as a joint tenancy with rights of survivorship (although they can opt out).

Now For Life Estates . . .

If one person owns the right to occupy and use property for her remaining life (she is called the “life tenant”) and the title specifies that the property passes automatically at the instant of the life tenant’s death (these folks are called the remainder interests . . . in the less gentle times of about 15 years ago they were called the remaindermen) the result is a life estate. Many folks call it “life time rights.”

While the life tenant has a right to live on the property or perhaps to collect rent on the property, she also has the responsibility of keeping it up and paying taxes on it.

Although theoretically a life tenant can encumber her life estate or sell her life estate, all she can do is dispose of or restrict whatever it is she owns . . . a life estate. No banker in his right mind will lend against a life estate because when the borrow dies . . . poof! . . . so does the banker’s security. The property passes free to the remainder interests. Same thing happens with respect to the life tenant’s creditors. Poof! Gone. Now don’t get excited . . . if the life tenant owned the property in fee simple and encumbered it before setting up the life estate the creditor isn’t going anywhere until someone pays up!

How To Set Up A Life Estate

Two ways. A fee simple property owner can set up a life estate for himself by conveying a remainder interest in the property to the intended remainder interests. The deed may say something like “I, Falstaff, the Grantor give Blackacre to Prince Hal, but retain a life estate in Blackacre.”

A way to set up a life estate for another person is for a fee simple property owner to convey property to another person as the life tenant and to yet another person as the remainder interest owner.  The deed may look like this: “I, Hotspur, convey Blackacre to Falstaff for life, with a remainder interest to Prince Hal.”

Will Medicaid Count a Life Estate for Eligibility Purposes?

In Georgia a life estate interest is a Medicaid-countable asset unless the property itself is not countable for some other reason (probably because it is the primary residence). In North Carolina a life estate is not countable . . . it simply renders the property regardless of value or size or type as a noncountable asset for Medicaid purposes.

Can the State Collect On Life Estate Property?

No. That is the beauty of a life estate. North Carolina only collects against probate property (and a life estate is not probate property . . . remember, it passes automatically at the life tenant’s death). The Georgia Department of Community Health says they can do it, but they never have and, unless the General Assembly drastically changes the law, they never will (Hint: read above about how a creditor goes “Poof!”).

Are There Other Medicaid Problems?

"They'll NEVER figure these out!"

Yep. Remember that if you transfer something valuable it will not count as an asset for Medicaid (you don’t own it anymore, after all!). However, the transfer will raise issues of whether a transfer penalty should apply. If Falstaff transfers $100,000 cash it will not count because he does not own it; however . . . in Georgia it will count as a transfer penalty of about 20 months and in North Carolina about 16 months if Falstaff applies for Medicaid within five years of the transfer.

The problem with setting up a life estate is that most of the time something valuable is being conveyed. For example, if Falstaff is 70 years old, Medicaid uses an actuarial chart that shows Falstaff’s life estate to be worth about 70% of the value of the property, and Prince Hal’s remainder interest to be worth 30% of the property value.

If Blackacre is worth $100,000 and Falstaff sets up the life estate by transferring the remainder interest to Prince Hal, then Falstaff has transferred property worth about $30,000 (assuming Blackacre is worth $100,000). If Falstaff applies for Medicaid within five years he has a $30,000 transfer issue to deal with.

On the other hand, Falstaff could have sold Prince Hal the remainder interest and there would be no problem.

One planning strategy that is occasionally used is for Falstaff to buy a life estate. If he pays $70,000 for the life estate in Blackacre, he will pay fair market value so there will be no transfer penalty. Further, in North Carolina the life estate won’t be countable as an asset (it will be in Georgia unless it is his residence).

A Final Life Estate Problem

The last paragraph sounded pretty neat, hunh? Not so fast. The rules slow that up a bit by saying that if the life estate purchased was in property that was “the home of another person” then Falstaff would actually have to live in the property for at least 12 continuous months. If he doesn’t live there 12 months or more, there will be a transfer penalty on the purchase even though he may have paid fair market value. If the property was not the home of another person, Falstaff should be OK.

Flying to the Rescue (From Texas?): Lady Bird Deeds

"Lyndon tried one of those fancy deeds on the house behind me, but there was some kind of problem."

I have no idea why they’re called Lady Bird Deeds or if Lady Bird Johnson used them (although her husband was one of Medicaid’s Founding Fathers).

A Lady Bird deed looks like a standard life estate deed at first glance, except that the Grantor retains the right to change his mind or give the remainder interest to someone else. “I, Falstaff, give Backacre to Prince Hal, but I retain a life estate in Blackacre and further retain the right to cancel this deed or to give the remainder interest to any other person so named.”

Would you pay Falstaff money for the remainder interest? Of course you wouldn’t. The remainder interest is worthless because Falstaff could always change his mind. On the other hand, if Falstaff dies without changing his mind, Prince Hal will automatically take Blackacre.

In North Carolina, because the remainder interest has no value Falstaff has not made a valuable transfer and there is no penalty. Further, on his death the property should pass free of estate recovery. Lady Bird deeds have worked fine for years. They do make me a bit nervous . . . they seem just . . . too easy. I’ll use them, but only if nothing else will work.

A recent Georgia Lady Bird sighting.

Georgia has an open season on Lady Birds. They don’t work. Period.

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41 Responses to “Life Estates In 5 Minutes”

  • monroe Pannell:

    Bob-read this article. I am puzzled that a life estate is not a countable asset. Back in 1965 my grandmother (who was 60 at the time) wanted to give her son –my dad something–she had already given his two brothers some land. So she conveyed to him a remainder interest in the house and lot reserving her life estate. My grandmother never accumulated great wealth in her lifetime- a hosiery mill worker. She stayed at home until about 1993–she was eligible for skilled nursing. But I recall that my dad had to buy her out of her life estate-spend down the proceeds- so she could qualify for Medicaid. What am I missing here.

    Monroe

    • Monroe, I’m not sure what the rules were back in 1993 (almost 20 years ago). That does seem strange, though. In any event, life estates are not countable pursuant to MA-2230 VII.A.4.a.

      • Jen Rogers:

        I may not be asking my question in the right comment area, I did ask this once and will try again.
        If a spouse is in a Nursing Home and receiving Medicaid for long term care, the community spouse has home in community spouse name only, when can the community reserve a life estate in the property in order to protect it in case the community spouse has to enter a nursing home. Can this be done while the Nursing Home spouse is still living or do they wait?

        • Yes, it can be done while the nursing home spouse is still living and it will not effect the nursing home spouse’s benefits. HOWEVER, the transfer involved for the community spouse in setting up the life estate (as outlined in the article) could have ramifications for the community spouse if she applies for Medicaid within 5 years of her setting up the life estate . . . the transfer penalty would depend on how valuable the remainder interest in the property is.

  • Jen Rogers:

    If one spouse is in long term care nursing home and receiving Medicaid, the other spouse is living in the community and the home is in the name of the community spouse only, can the community now transfer the home reserving a life estate for herself to protect the home place or is it too late. Can this be done while the nursing home spouse is still living??

    • See my reply under Monroe Pannell’s thread above . . . I think I answered your question. Let me know if you need more info.

      • Jen Rogers:

        Yes Mr. Mason, you did answer my question and I thank you so much. The two posts were a result of my not being sure where to comment.

        I do want to state that the home was also considered the home site when the Nursing Home spouse was being certified, however the home was already in the name of the Community spouse only. Will that make a difference in going ahead and establishing a look back for the Community Spouse? We had thought if the home was sold or transferred the Community Spouse would have to re-invest in new property within a certain time frame.

        • The fact that the property was already in the community spouse’s name will make no difference. As far as reinvesting sale proceeds, that has nothing to do with Medicaid.

          • Jen Rogers:

            Ok Mr. Mason, I will not take more of your time. I had thought that Medicaid rules stated that if a homesite was sold while the Nursing Home resident was still living in a nursing home and the proceeds from the sale were not re-invested in another home of equal or more value then part of the money not re-invested would belong to the Nursing Home spouse thus causing a problem.

            In our case the home is not in the name of the Nursing Home spouse so you have answered our main question and I thank you again for all your help.

  • Mazie Craven:

    Thanks for discussing the life estate issue at the May 10th meeting at the library. I appreciate the explanation in writing which makes it easier to absorb and understand. See you at this Thursday meeting. Thank you for all your time and effort you have put into this. Your techincal abilities aren’t half bad either!!

  • Lynn E:

    When granting a life estate to someone else, what are the tax implications, such as gift tax and step up basis when the property is sold for the giver and the grantee

    • The value of the remainder interest is a gift. North Carolina has no gift tax (nor does Georgia, if any Georgia readers see this). The Feds DO have a gift tax. However, under the federal gift tax, you may gift up to $13,000 a year to as many individuals as you like without even having to think about a gift tax return to the Feds. That increases to $26,000 for you and a spouse. Even if you go over that limit and are required to file, you don’t have to even think about any taxes due unless you have made gifts in excess of $5,000,000.

      The remainder interest will receive a full stepped-up basis.

  • Lynn E:

    Mr.Mason, My mother is considering making a life estate to me however in reading your answers we are confused. My father is residing in a Nursing Home and is already approved by Medicaid, the house is in sole name of my mother. We read in the
    North Carolina guidelines on asset transfers quote” The look back period for 1 spouse controls for the other spouse even if the 2nd spouse has not yet applied.

    Also Transfers of property exempt as a former home site are penalized if transferred and change of ownership is always penalized, even if it was exempt at approval.

    Does this mean that we will have a problem. We are beyond confused

    This has confused both myself and my mother as you answered that it would not affect my fathers Medicaid if my mother makes this life estate. Could you clarify.

    Thank you

    • Take them one at a time:

      1. The look back period does indeed apply “even if the the 2nd spouse has not yet applied.” The look-back period does NOT apply with respect to the nursing home spouse AFTER the nursing home spouse has been approved for Medicaid. The look-back period DOES apply for one spouse if the other makes a transfer BEFORE the non-transferring spouse has applied for and been approved.

      2. I’m not sure what “guidelines” you are referring to, so it is hard to answer.

      3. As the article says, transfers of ownership by the community spouse AFTER the nursing home spouse has been approved are not sanctionable transfers as to the nursing home spouse . . . it doesn’t matter what the community spouse does.

      4. It MAY matter if the community spouse later applies for Medicaid herself . . . then it may be a penalty for HER . . . it will not matter to her spouse in the nursing home.

      • Thank you Mr. Mason. so your number 4.reply saying that it does matter if the community spouse makes a transfer they will go by the first spouse look back, which in our case would mean they would look all the way back to 2007, thus more than a 5 year look back for the community spouse if she had to apply for Medicaid.

        Are we understanding this right. If my mother keeps a life estate for herself and the remainder to me, then if she had to apply at some point, they would look back all the way to 2007 and count any transfers from that point on meaning for her she would always be penalized, not just 5 years???

        I am thinking that even if my father passes before my mother, our chances of making a life estate are gone if my mother has to ever apply for Medicaid

        • No, no . . . we’re getting all snarled up here. If community spouse makes a transfer of assets after the nursing home spouse is on Medicaid:
          (1) It will have NO effect on the nursing home spouse’s Medicaid,
          (2) It COULD affect the community spouse if she applies for Medicaid within 5 years of the time she transferred the asset. I’m not sure where you’re getting the concerns about looking back to 2007. Never, ever is there a penalty imposed more than five years after a transfer.

          • Lynn E:

            Ok, you have answered this in a way we do understand. We were thinking since the look back for 1 spouse controls for the other spouse even if the 2nd spouse has not yet applied would cause us to always have a look back all the way back to 2007.

            Thank you so much. We understand now. My mother would have her own look back since my father has already been approved. You have saved our day. Thanks again.

          • Great! Glad to help.

  • RDP:

    Hi Bob, My husbands parents deeded their home to us and kept a life estate on it about 15 yrs ago or more. Both his parents got medicaid later in years. His father passed away 4 yrs ago. His mother has an in home aid worker 8 hrs a day 5 days a wk. She did spend some time in the nursing home after a hip fx. She now lives with us and her aid comes to our house while we are at work. Her home is sitting empty and we have the up keep of the home, powerbill, lawn care, ect. We were told if we sold the home it would be a transfer of property and she would be penalized on her medicaid. We did give a small strip of the property to neighbors about 2 yrs ago that had a tax value of around $30. After doing this Helen(mother-n-law) was contacted by her social worker and we were told that even though we received no money, it was still a transfer of property and would have to pay back $100 to the in home aid company.

    I don’t understand why we can’t sell the house, it’s hard to keep 2 homes up. She will never go back to her home, she’s 89 yrs old. She will live with us up until we are unable to care for her, then she will go to the nursing home. If we sold the house, the money would go toward our home.

    Could you help me to understand this better??? Thank you!

    • If your mother-in-law truly set up a life estate (she kept a life estate and your husband owns the “remainder interest”) both she and your husband have a current ownership interest in the house. Her interest is worth 29.526% and your husband’s interest is worth 70.474% (I had to look that up on the life estate charts . . . so just take my word for it). So while the house is not a countable asset for Medicaid purposes, if she transferred her interest for less than fair market value, it would be a Medicaid sanctionable transfer. In other words, if the house was worth $100,000 and you gave it away, she would be hit with a Medicaid transfer sanction on $29,526 (29.526% of $100,000 . . . the value of her life estate). When the strip worth $30 was given away her life estate was worth 32.262% (it gets smaller the older she gets) . . . so she had a transfer of $9.68 . . . it is absolutely beyond me why they penalized her $100 . . . it may have been an error . . . who knows.

      If you sold the home, $29,526 (assuming, as an example, the home is worth $100,000) then $29,526 would be treated as hers and $70,474 would be treated as your husband’s. With $29,526 your mother-in-law would no longer be eligible for Medicaid. Of course, if she transferred the money to your husband she would have a $29,526 Medicaid sanctionable transfer.

      My informal advice (not legal . . . just personal . . . I can’t dispense legal advice without a formal client relationship) would be NOT to sell the house until your mother-in-law’s death, if at all possible. It will pass to your husband 100% free of estate recovery and he could do what he wants with it then. If the upkeep is getting painful, consider renting it out. As life tenant, the rent (net of the expenses of taxes, maintenance, etc) belongs to your mother-in-law and could be used for her care (or perhaps would be used to reduce Medicaid dollar-for-dollar).

      Hope this helps!

  • RDP:

    That is in the state of NC.

  • L.E.:

    You said in one of the above comment answers that Community spouse with property in their own name could transfer the property while the Nursing home spouse is in a Nursing home receiving Medicaid.

    I am wondering how this is not considered a penalty to the Nursing home spouse when in North Carolina property cannot be transferred unless both spouses sign simply because they are married and under North Carolina law it requires both signatures.

    • I love it when people pay attention! Good question. Transfers between spouses are not sanctionable transfers. So what you’d want to do is transfer from the property interest that the nursing home spouse has to the community spouse . . . resulting in the entire property being in the name of the community spouse. THEN transfer it. Just don’t forget that the transfer by the community spouse has potential ramifications for the community spouse in case he or she later has to apply for Medicaid.

      • L.E.:

        Thank you Mr. Mason for the answer, but as I was asking, how can the community spouse make a transfer in North Carolina while still married, even if the property is in one spouses name. In North Carolina it is a law that you cannot transfer without both signatures regardless who owns it if you are married.

        • L.E.:

          addition to above reply. So, if under North Carolina law it requires the nursing home spouse signature by virtue of marriage, then would this not be a transfer of martial interest in the property by the nursing home spouse and therefore be a penalty under medicaid.

          • In North Carolina and Georgia, transfers between spouses are not penalized.

            In North Carolina and Georgia, if a community spouse spouse transfers assets AFTER the other spouse has been qualified for Medicaid, that transfer will not disqualify the nursing home spouse.

  • Kathy:

    If a life estate holder is relocated to an assisted living/rest home with no hope of returning to the home, does the life estate terminate?

  • Lois:

    My parents are both 80 years old and my mother’s health is beginning to fail. They own their home with no encumbrances that I am aware of and want to deed it to me (I am single) and retain life estates. They are on medicare and have retirements incomes and social security incomes. If they do this now will I have tax ramifications to deal with now? The home is valued at approximately $170,000. Will they be penalized qualifying for Medicaid within 5 years of the transaction? Should the house be put in my father’s name first before creating the life estate deed transfer?

    • Sorry for the delay! While there will be no real tax ramifications, the creation of the life estate and the transfer of the remainder interest to you WILL create Medicaid transfer penalty issues if either applies for Medicaid within 5 years. There IS a better way to accomplish the same thing, but it is way, way too complicated to explain in a com box.

  • Could you tell me is nc used only non probate for medicaid nursing home recovery? This is heir property. Also has there been a change in allowing liens in nc?

  • B.L.:

    My mother inlaw,in North Carolina, put her home in a Life Estate March 2009 naming her four children as Grantees with one quarter interest each. One year ago the decision that she needed to enter an Assisted Living facility was made by the child that had Power of Attorney on the advice of a doctor. All four children were not in agreement with this decision, but that is a story for another day.

    My husband has been contacted by his sister, who has been made General Guardian as of Feb 2013, that in order to continue paying for their mother’s care her house needs to be sold. It was advised that their mother’s share would be approx. 39 percent and the balance would be divided by the 4 siblings. It is understood that all four siblings and their spouses have to sign off on everything pertaining to the sale.

    It has been found that in my mother inlaw’s will, she wants everything divided equally between her children. However, she did specify that there were to be deductions made from 2 children’s inheritance due to money that she had given previously.

    Because of the ill feelings and lack of trust, there are questions. Can the guardian take the will into consideration when the proceeds of the sale of the house are disbursed? Also as general guardian, is she required to give any type of accounting to the other 3 siblings of their mother’s affairs?

    • You are correct . . . unless everyone agrees, there is NO sale. Everyone must sign the deed upon sale for an effective sale. No deed, no sale.

      Her will would have nothing to do with how the sale proceeds are divided. If she was deemed to own 39% as a result of her life estate, then the four “remainder” interests (the four kids) own 15.25% each (61% total). Each kid walks away with 15.25% upon sale and can do anything he/she wants with it.

  • Edith:

    I have written before. Not sure if you got it. I have spent months on trying to find some answers. You just have written that NC is probate only, for medicaid recovery if I am understanding most of what I have read. My mother, brother and I are heirs to our fathers property. My mother passed away and it was our understanding since she was not sole heir, the real property would be ours automatically at her death. We are the only heirs from our father since our gr-grandfather. This property was in our family at that time. We have been given a bill as we understood was required by the Federal Government, but did not think we had anything available to them, since we had been signed off to medicaid, along with what income she had after her money had all been spent on her care and were not advised of medicaid recovery, but thought unless we sold. How in NC do they take land without a lien? I have had several elder care lawyers tell me that they did not know enough about this to answer my question, one I paid to tell me that. Also I had a lawyer tell me that everything had to go through probate. Please help! It will be a year since she died in January. The person in Raleigh that was handling hers told me the only thing that would have not resulted in medicaid recovery would have been life estates. I have printed off hundreds of pages that tell me as I believe. Thank you in advance.

    • It is difficult to answer from the facts. I am unclear as to what is going on here. If your mother owned a portion of the land with others (called a tenancy in common), upon her death that portion would be a probate asset of her estate and, yes, available to estate recovery. Contrast that with what is called a “joint tenancy with rights of survivorship” (her share passes automatically without probate . . . and without estate recovery) or with a life estate (she has a lifetime right only and upon her death it is “extinguished” with no estate recovery and the “remainder interests” owning the property). I simply can’t tell exactly how the property was titled.

      Sorry you’ve had problems with other attorneys. If I had all the facts I could easily tell you what is going on.

  • Edith:

    Let me try again. We inherited the land from my father. My mom would be an heir with my brother and myself. She passed away in nursing home at l05 and I was thinking we would be joint heirs. My father had no will. Mother thought she had to have a will and at 95 we took her, since it was bothering her so much that she did not have one. She just told them that she wanted her children to have everything she had and was added, to be theirs absolutely and in fee simple: and to our children if we were deceased. This farm had been in our family since they came to US in late l700s and we strived to pay taxes but had no plans to sell it. Our grandparents lived hard there, spring for water and no electricity. We now have just gotten in a forestry program, which will help. Sorry for the long explanation. The bill is for over $l00,000. Thank you for your patience and help.

  • Teresa:

    Dear Mr. Mason,
    I was doing some research on life estates and came across your website. I just wanted to write and commend you for providing such detailed and helpful information to people who may or may not have the resources to hire an attorney. Excellent work! Any chance you’re licensed to practice in Virginia?

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