Elderly Parents - Putting Home into Life Estate?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Baseballmom94
Posts: 70
Joined: Fri Mar 01, 2013 10:25 am

Elderly Parents - Putting Home into Life Estate?

Post by Baseballmom94 » Sat Jul 05, 2014 8:10 pm

My parents in-law are 80 and 90 years old. They are considering adding their two children to their house deed in the form of a Life Estate where my in-laws would be the Life Tenant Owner and the children would be the Remainder Owners. This is in the state of Massachusetts. Perusing the information from the elder law attorney, there seem to be many advantages to this transfer of ownership over a gift of property to the heirs.

Does anyone have experience with this type of joint ownership and would you recommend that this be done or does it cause more problems than it is worth in regards to tax liabilities for both parties?

Also, can anyone advise on pertinent questions to ask the elder law attorney? Thank you so much!
Last edited by Baseballmom94 on Sat Jul 05, 2014 8:30 pm, edited 1 time in total.

Retread
Posts: 703
Joined: Mon Apr 08, 2013 6:29 pm
Location: Southwest Florida

Re: Elderly Parents - Putting Home into Life Estate?

Post by Retread » Sat Jul 05, 2014 8:15 pm

What are the advantages set forth by the attorney? I can't think of any.
Bruce
absit iniuria verbis

bsteiner
Posts: 3324
Joined: Sat Oct 20, 2012 9:39 pm
Location: NYC/NJ/FL

Re: Elderly Parents - Putting Home into Life Estate?

Post by bsteiner » Sat Jul 05, 2014 8:41 pm

It's a common Medicaid planning technique, to protect the remainder interest in the house (or any other assets that they give away but retain an income interest).

We would need to know more about their assets and income, and their objectives, to know whether this is likely to make sense in their particular case.

If it's likely to make sense, they should consider what would happen if they want to sell their home and buy or rent another home. They should also consider providing for their children in trust rather than outright, to keep the children's interests out of their estates for estate tax purposes, and to protect the children's interests against their creditors and spouses.

Baseballmom94
Posts: 70
Joined: Fri Mar 01, 2013 10:25 am

Re: Elderly Parents - Putting Home into Life Estate?

Post by Baseballmom94 » Sat Jul 05, 2014 8:42 pm

Advantages according to the attorney:

1. Simplicity and Low Cost to Establish

2. Avoids Probate

3. Simplicity of Clearing title to Real Estate

4. Life Tenant's Right to Occupancy is Protected Regardless of Debts or Actions of Remainder Owners

5. Income Tax Advantage to Heirs upon Death of Life Tenant. When real estate owned in Life Tenancy form is not sold until after the death of the Life Tenants, the heirs (Remainder Owners) get the full benefits of a stepped-up tax basis for capital gains purposes.

6. Medicaid Planning. After 5 years passes after the date of the transfer, the property is protected from Medicaid claims.

Primary Disadvantage according to attorney:

1. Income Tax Consequence on Sale of Real Estate during the lifetime of the Life Tenants. Remainder owners would be subject to taxes on their 50% portion of the profit upon sale of the property.

Baseballmom94
Posts: 70
Joined: Fri Mar 01, 2013 10:25 am

Re: Elderly Parents - Putting Home into Life Estate?

Post by Baseballmom94 » Sat Jul 05, 2014 8:59 pm

Their assets are:

$250,000 cash/investments

$350,000 estimated value of house

They live off of their pensions and social security so the $250,000 is the money that would be available for long term care.

The objectives are mainly to simplify settlement of the estate, protect my in-laws from advisers trying to have them take out a reverse mortgage (they have been taken advantage of before in other matters), and to provide protection from Medicaid if one of them were to require long-term care. I understand this is only possible after the five year period. Another concern is if one of them were to enter a nursing home, how would the other spouse be protected from claims made on the small assets or home by Medicaid?

bsteiner
Posts: 3324
Joined: Sat Oct 20, 2012 9:39 pm
Location: NYC/NJ/FL

Re: Elderly Parents - Putting Home into Life Estate?

Post by bsteiner » Sat Jul 05, 2014 9:19 pm

Baseballmom94 wrote:Advantages according to the attorney:

1. Simplicity and Low Cost to Establish

2. Avoids Probate

3. Simplicity of Clearing title to Real Estate

4. Life Tenant's Right to Occupancy is Protected Regardless of Debts or Actions of Remainder Owners

5. Income Tax Advantage to Heirs upon Death of Life Tenant. When real estate owned in Life Tenancy form is not sold until after the death of the Life Tenants, the heirs (Remainder Owners) get the full benefits of a stepped-up tax basis for capital gains purposes.

6. Medicaid Planning. After 5 years passes after the date of the transfer, the property is protected from Medicaid claims.
#6 is the principal one.

The other's aren't significant:

#1 - it's not simpler or less expensive than not doing this.
#2 - you probate the Will, not the assets. Probating a Will is generally not particularly difficult, expensive or burdensome.
#3 - I don't understand this, since it results in two transfers (one now and one after death) rather than just one.
#4 - their right to occupancy would be protected against their children even if they didn't do this. (To protect the children against their creditors and spouses, they could provide for their children in trust rather than outright).
#5 - the heirs would get the same basis step-up even if they didn't do this.
Baseballmom94 wrote:Primary Disadvantage according to attorney:

1. Income Tax Consequence on Sale of Real Estate during the lifetime of the Life Tenants. Remainder owners would be subject to taxes on their 50% portion of the profit upon sale of the property.
That's easy to avoid. If they do this, they can do it by creating a trust in which they retain the income for live (which would include the right to occupy the residence). The trust can be a grantor trust for income tax purposes (in other words, they would be taxable on the income and gains of the trust, as if they continued to own the trust assets). That way, if the house is sold, they can use their $250,000 or $500,000 exclusion for the sale of a principal residence.
Baseballmom94 wrote:Their assets are:

$250,000 cash/investments

$350,000 estimated value of house

They live off of their pensions and social security so the $250,000 is the money that would be available for long term care.

The objectives are mainly to simplify settlement of the estate, protect my in-laws from advisers trying to have them take out a reverse mortgage (they have been taken advantage of before in other matters), and to provide protection from Medicaid if one of them were to require long-term care. I understand this is only possible after the five year period. Another concern is if one of them were to enter a nursing home, how would the other spouse be protected from claims made on the small assets or home by Medicaid?
Given their assets, this is something they might consider.

Protecting against being taken advantage of is more difficult. If you have reason to think this could happen, you could put your assets into a trust for your own benefit in which you don't have the right to amend or revoke the trust without someone else's consent. This assumes that you have an appropriate person or persons to serve in that capacity.

User avatar
arcticpineapplecorp.
Posts: 2928
Joined: Tue Mar 06, 2012 9:22 pm

Re: Elderly Parents - Putting Home into Life Estate?

Post by arcticpineapplecorp. » Sat Jul 05, 2014 9:59 pm

bsteiner wrote: That's easy to avoid. If they do this, they can do it by creating a trust in which they retain the income for live (which would include the right to occupy the residence). The trust can be a grantor trust for income tax purposes (in other words, they would be taxable on the income and gains of the trust, as if they continued to own the trust assets). That way, if the house is sold, they can use their $250,000 or $500,000 exclusion for the sale of a principal residence.
Not exactly. In PA we don't consider trusts protection from Medicaid for long term care...only certain trusts, called special needs trusts for adult (or minor) children with disabilities.

Something to consider--A life estate can be revocable or irrevocable and how it's set up matters.

Finally, if the establishment of the life estate is less than the fair market value, it will result in a penalty period imposed for Medicaid.

There's much more details on the subject...if you wish to PM me I can share some links with you that spell out much more.
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

bsteiner
Posts: 3324
Joined: Sat Oct 20, 2012 9:39 pm
Location: NYC/NJ/FL

Re: Elderly Parents - Putting Home into Life Estate?

Post by bsteiner » Sat Jul 05, 2014 11:03 pm

arcticpineapplecorp. wrote:...
Not exactly. In PA we don't consider trusts protection from Medicaid for long term care...only certain trusts, called special needs trusts for adult (or minor) children with disabilities....
Their retained income interest won't be protected. This is acceptable to people who do this.
arcticpineapplecorp. wrote:...Something to consider--A life estate can be revocable or irrevocable and how it's set up matters. ...
They own the entire property. They would be giving away the remainder interest and retaining the life estate or income interest. How can a retained interest be revocable?
arcticpineapplecorp. wrote:...Finally, if the establishment of the life estate is less than the fair market value, it will result in a penalty period imposed for Medicaid. ...
The gift of the remainder interest, like any other gift, will result in a penalty period (a period of time within which they won't be able to get Medicaid if they go into a nursing home). That limits the utility of this technique. You have to make the gift sufficiently in advance of going into a nursing home, at a time when you're probably still healthy. If you make the gift, you've given up ownership, control and flexibility even if you never go into a nursing home.

In this case, they'll still have some other assets, and they have pension and social security income, so they may not need their other assets so long as they remain healthy. They're also sufficiently young (in this context) that there's a good chance that if they go into a nursing home it won't be for at least five years.

On the other hand, their other assets and their pension and social security income may cover much of the cost of long-term care, especially if only the survivor needs long-term care, and not for a long period of time. So they might decide not to do this, so that they can preserve their ownership and control over their assets.

User avatar
arcticpineapplecorp.
Posts: 2928
Joined: Tue Mar 06, 2012 9:22 pm

Re: Elderly Parents - Putting Home into Life Estate?

Post by arcticpineapplecorp. » Sun Jul 06, 2014 12:25 pm

bsteiner wrote:
arcticpineapplecorp. wrote:...Something to consider--A life estate can be revocable or irrevocable and how it's set up matters. ...
They own the entire property. They would be giving away the remainder interest and retaining the life estate or income interest. How can a retained interest be revocable?
For MA purposes, there are four types of life estates:

A revocable life estate (also known as life estate with full or partial powers) in which the applicant, the recipient, the applicant’s spouse or the recipient’s spouse is the grantor of the property and is deeding or granting ownership to a remainderman.

An irrevocable life estate (also known as life estate without powers) in which the applicant or recipient or applicant’s spouse or recipient’s spouse is the grantor of the property and is deeding or granting ownership to a remainderman.

A revocable life estate in which the applicant or recipient or applicant’s spouse or recipient’s spouse is the purchaser (remainderman) of a life interest in another person’s home.

An irrevocable life estate in which the applicant or recipient or applicant’s spouse or recipient’s spouse is the remainderman of a life estate in another person’s home.


Treatment of Revocable Life Estates

A revocable life estate in which the applicant or recipient or applicant’s spouse or recipient’s spouse is the grantor may be treated as an available asset. The remainderman might be left with nothing. The deed establishing a life estate with full or partial revocable powers is not considered a transfer of ownership.

1. Count the fair market value (FMV) of the property as an available resource if the property is the applicant’s/recipient’s home and the applicant/recipient has not indicated intent to return to the property.

Example: Mr. B established a revocable life estate on his home with his son. The property’s FMV is $120,000. Mr. B is the grantor. Mr. B does not plan to return to the property. The FMV of $120,000 is counted as an available resource.

2. Exclude the property if the property is the applicant’s/recipient’s home and the applicant/recipient has indicated intent to return to the property.

Example: Mr. C established a revocable life estate on his home with his daughter. The property’s FMV is $90,000. Mr. C is the grantor. Mr. C plans to return to the property and indicates intent to return. The FMV of the property is not counted as an available resource, because Mr. C indicated intent to return to his own home.

3. Exclude the property if the property is the current home of the applicant’s/recipient’s spouse.

4. Count the FMV of the property as an available resource if the applicant’s/recipient’s spouse is the grantor and the property is not the current home of the applicant’s/recipient’s spouse.


Treatment of Irrevocable life estate is a little more complicated which is why I encouraged the OP to PM me (so I don't have to list it all out here).
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

Sagenick48
Posts: 338
Joined: Sat Nov 02, 2013 8:22 am

Re: Elderly Parents - Putting Home into Life Estate?

Post by Sagenick48 » Sun Jul 06, 2014 3:22 pm

Only two quick comments both from experience. First, as I remember the law, an interest in a life estate requires a gift tax return even if under the annual exclusion amount. Second, I had the experience of this situation only to find that one of the children decided to go bankrupt, the result was when mon and dad decided to sell the house the bankruptcy trustee got a part of the money, which in this instance was more than what so owed, so the creditor got a 100% payback. Put that in your pipe and smoke it.
The market goes up, the market goes down.

bsteiner
Posts: 3324
Joined: Sat Oct 20, 2012 9:39 pm
Location: NYC/NJ/FL

Re: Elderly Parents - Putting Home into Life Estate?

Post by bsteiner » Sun Jul 06, 2014 4:09 pm

arcticpineapplecorp. wrote:...

For MA purposes, there are four types of life estates:

A revocable life estate (also known as life estate with full or partial powers) in which the applicant, the recipient, the applicant’s spouse or the recipient’s spouse is the grantor of the property and is deeding or granting ownership to a remainderman...
You were a bit too cryptic. In this example, the retained life estate isn't revocable. That wouldn't make any sense, since the donor originally had absolute ownership. In this example, the transfer of the remainder interest is revocable. I'm not sure what this is intended to accomplish.
Sagenick48 wrote:Only two quick comments both from experience. First, as I remember the law, an interest in a life estate requires a gift tax return even if under the annual exclusion amount. Second, I had the experience of this situation only to find that one of the children decided to go bankrupt, the result was when mom and dad decided to sell the house the bankruptcy trustee got a part of the money, which in this instance was more than what so owed, so the creditor got a 100% payback....
A gift of a remainder interest is treated as a gift of the entire value of the property. In other words, the value of the retained life estate is disregarded for gift tax purposes. There are some ways to make the gift incomplete for gift tax purposes. However, now that the estate and gift tax exempt amount is $5,340,000 (indexed), there's little practical significance to this other than having to file a gift tax return. Not very many people with estates over $5,340,000 do Medicaid planning.

The second example could have easily been avoided by making the gift of the remainder interest in trust rather than outright. That way, the bankruptcy trustee couldn't have reached it. If you provide for your children in trust rather than outright, the assets won't be included in the children's estates for estate tax purposes, and will be better protected against your children's creditors and spouses.

Baseballmom94
Posts: 70
Joined: Fri Mar 01, 2013 10:25 am

Re: Elderly Parents - Putting Home into Life Estate?

Post by Baseballmom94 » Sun Jul 06, 2014 8:43 pm

Thank you very much, bsteiner and arcticpineapple, for your advice and expertise. This is a lot of information to digest and is not a simple decision. Bottom line: if it were your parents in this situation, what would you do in order to act in their best interests? Thank you again very much! My husband and I are very appreciative of your input!

ralph124cf
Posts: 1932
Joined: Tue Apr 01, 2014 11:41 am

Re: Elderly Parents - Putting Home into Life Estate?

Post by ralph124cf » Sun Jul 06, 2014 9:19 pm

I am constantly amazed at the detailed, somewhat esoteric, knowledge that people on this forum display. I'm not talking about just this thread of course.

I also appreciate the effort of most to use proper English and grammar, and proofread their posts.

Ralph

bsteiner
Posts: 3324
Joined: Sat Oct 20, 2012 9:39 pm
Location: NYC/NJ/FL

Re: Elderly Parents - Putting Home into Life Estate?

Post by bsteiner » Sat Jul 12, 2014 8:54 pm

Baseballmom94 wrote:Thank you very much, bsteiner ... if it were your parents in this situation, what would you do in order to act in their best interests? ...
That's a hard question since I don't know your in-laws, and since their assets are at a level where different people might make different choices. A forum such as this can be useful for providing general information, but not for specific advice.

By coincidence, a few days ago a friend from kindergarten with a similar situation (except she's a widow, and considerably younger than your in-laws) said that someone had proposed something similar for her. We discussed the tradeoff of flexibility and control in exchange for Medicaid protection. Since she's substantially younger, she concluded that the flexibility and control were more important, so she decided not to put her assets into an income-only trust, at least for now. Of course, if her parents had provided for her (in their Wills) in trust rather than outright, her inheritance from them would have been protected, while she could have still controlled it. Similarly, if her husband had provided for her in trust rather than outright, her inheritance would have been protected (after the waiting period), while she could still have controlled it.

If they're 90 and 80, I'm guessing that your father-in-law is 90 and your mother-in-law is 80. If that's correct, it's more likely than not that your mother-in-law will be the survivor, since she's younger and female.

You didn't say how much income they have (or how much income your mother-in-law will have after your father-in-law's death if she survives him). The more income she'll have, the less of a concern the potential cost of the long-term care becomes.

The elective share in Massachusetts is the income from 1/3 of the estate, except for $25,000 that's outright. So another possibility is for him to (in his Will) leave her 1/3 of his estate in a marital trust in which she receives all of the income (except for $25,000 outright), and the other 2/3 in a credit shelter type trust that's fully discretionary. That provides more flexibility, though it exposes her assets. Since it satisfies the elective share, you could check to see if it avoids a waiting period. Alternatively, he could leave his entire estate in a credit shelter trust. That provides even more flexibility, though it exposes her assets. You would have to check whether her failure to claim her elective share would be considered a transfer that would result in the waiting period.

Carl53
Posts: 1572
Joined: Sun Mar 07, 2010 8:26 pm

Re: Elderly Parents - Putting Home into Life Estate?

Post by Carl53 » Wed Jun 10, 2015 5:17 am

bsteiner wrote:
Baseballmom94 wrote:Advantages according to the attorney:

1. Simplicity and Low Cost to Establish

2. Avoids Probate

3. Simplicity of Clearing title to Real Estate

4. Life Tenant's Right to Occupancy is Protected Regardless of Debts or Actions of Remainder Owners

5. Income Tax Advantage to Heirs upon Death of Life Tenant. When real estate owned in Life Tenancy form is not sold until after the death of the Life Tenants, the heirs (Remainder Owners) get the full benefits of a stepped-up tax basis for capital gains purposes.

6. Medicaid Planning. After 5 years passes after the date of the transfer, the property is protected from Medicaid claims.
#6 is the principal one.

The other's aren't significant:
Regarding the medicaid planning 5 year look back on the life estate, if the life estate was set up say 10 years prior, what amount, if any would joint life tenants be subject to if they became medicaid recipients? My in-laws set up a life estate with my spouse's siblings being remainder owners about 10 years ago when they were 70 and 75. The is a possibility that their other funds might not cover their expenses should they both go into a nursing home.

I've spent a few hours googling this topic and my head is spinning. I seem to find conflicting references as to using the parents age at the time of transfer and the parents age now when looking at the federal mid term interest tables and Table S.

Carefreeap
Posts: 2326
Joined: Tue Jan 13, 2015 7:36 pm
Location: SF Bay Area

Re: Elderly Parents - Putting Home into Life Estate?

Post by Carefreeap » Wed Jun 10, 2015 9:01 am

The Medicaid requirements are state specific. I know in CA Life Estates are exempt assets.

The is current legislation that proposes an exemption of a "moderate" home.

NotWhoYouThink
Posts: 1881
Joined: Fri Dec 26, 2014 4:19 pm

Re: Elderly Parents - Putting Home into Life Estate?

Post by NotWhoYouThink » Wed Jun 10, 2015 10:41 am

This post is a year old, surely OP and family have already made a decision.

Carefreeap
Posts: 2326
Joined: Tue Jan 13, 2015 7:36 pm
Location: SF Bay Area

Re: Elderly Parents - Putting Home into Life Estate?

Post by Carefreeap » Wed Jun 10, 2015 11:06 am

NotWhoYouThink wrote:This post is a year old, surely OP and family have already made a decision.
Looks like the thread was bumped for the post before mine. The poster probably should start his own thread. Good catch.

Carl53
Posts: 1572
Joined: Sun Mar 07, 2010 8:26 pm

Re: Elderly Parents - Putting Home into Life Estate?

Post by Carl53 » Wed Jun 10, 2015 2:32 pm

I added to this thread instead of starting a new one as it is one that had several relevant comments and I hoped that one or more of the original responders might jump in.

Post Reply