In a previous article, we explored the benefits of reserving a life estate to protect your home from the high cost of nursing home care. (You can read the full article here) Reserving a life estate is a common planning technique where the home is deeded to a loved one, typically your adult child(ren), and a life estate is reserved for yourself. This transfers ownership to your child (remaindermen) while giving you (the life estate holder) the right to live in the home for the rest of your life. This article will explore some aspects of reserving a life estate that may be seen as downsides by some who are considering this planning option.
Here are some limitations to consider:
Loss of control
A significant issue with reserving a life estate is the loss of control. You cannot sell or mortgage the home without the consent of the remaindermen (your child or beneficiaries). This includes obtaining a “reverse mortgage” to provide needed cash flow in your retirement years. The remaindermen, however, can mortgage the home, refinance, or even sell it (subject to your life estate) without you having any say.
You are still responsible
As the life tenant, you are still responsible for all household expenses, including but not limited to, property taxes, water/sewage charges, condo fees (if applicable), special assessment fees.
Your net proceeds are limited if home is sold during your lifetime
If the home is ever sold during your lifetime, you are only entitled to receive the proceeds attributable to the Life Estate value and nothing else. Currently, there is a no clarity regarding how the value of your life estate will be calculated. The IRS uses one method, and MassHealth (Medicaid in Massachusetts) uses another. This can cause major issues should you want to become eligible for MassHealth long-term care benefits.
The home is subject to a remaindermen’s bankruptcy
If one of your children/remaindermen files for Chapter 7 bankruptcy, your home may be reachable by the Bankruptcy Trustee who could force the sale of the home.
No changes
Once you sign the deed transfer reserving a life estate for yourself, you cannot undo the transfer or change the beneficiaries. On the other hand, setting up a MassHealth Trust would permit you to change the beneficiaries by reserving and exercising a Special Power of Appointment in the trust.
Deciding whether to reserve a life estate takes careful consideration and knowledge of both the pros and cons. If your goal is to protect your home from nursing home costs, working with an experienced Elder Law Attorney is essential.
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