The Life-Estate Deed is a tool for Probate Avoidance and Medicaid-Planning. The owner of Real Estate deeds it to children (or other beneficiaries) while retaining the life-time right to use the property. The retained right to use the property is the “Life-Estate” and the holder is called the “Life Tenant.” The beneficiaries on the deed get a future interest in the property and are called the “Remainder Owners.”

The Life-Tenant has the exclusive right to live in and use the property. If the property is rented, the Life Tenant gets the income. The Life Tenant is responsible for the upkeep of the property including real-estate taxes. The Remainder Owners have no right to use the property and are not responsible for the expenses. They come into full ownership of the property upon the death of the Life Tenant and are then responsible for expenses.

A Life Estate deed is fairly simple to put into place. You just need an attorney to draft it for you, then it needs to be signed and recorded at the Registry of Deeds. The legal fees and Registry filing fees should not be too expensive. Of course, before signing a Life-Estate Deed, you and your attorney should discuss the advantages and disadvantages, so you understand what you are doing and know that you are making the right decision. This is an irrevocable decision that you cannot take back.

Ownership will pass on your death to the Remainder Owners outside of Probate. This can save time and money. (Of course, other assets you own may have to go through Probate). The Remainder Owners will need to record your death certificate at the Registry and perhaps an affidavit regarding estate taxes, but other than that, they should have good title to the property and be able to sell it quickly or move in right away if they wish.

The Remainder Owners get a “step-up” in basis on the property when you die. They should have little taxable gain on a sale after your death. That brings up one of the disadvantages. If the property is sold during the Life-Tenant’s lifetime, the Remainder Owners get a share of the proceeds (based on the IRS life-estate tables) and may have income-tax due on part of those proceeds. The Life-Tenant can probably avoid income-taxes, but will not get the full value of the property as the other owners get part of the value. The IRS tables are based on age so the older the Life-Tenant, the less that share is worth.

A Life-Estate Deed will work for Medicaid-Planning purposes in Massachusetts. If the Life-Tenant has to go into a nursing home, the Medicaid office cannot require a sale of the property, and they cannot go after the value of the property after the death of the Life Tenant. However, during the time when the Life Tenant is in a nursing home and on Medicaid, the property must be held and the Remainder Owners may have to pay the expenses. In New Hampshire, the portion of the value of a Life Estate Deed that was owned by a Medicaid recipient just prior to death is subject to Medicaid Estate Recovery.

Since a Life-Estate Deed is irrevocable it is a serious step that should only be undertaken with a thorough understanding of the pros and cons. It works better in some situations than others and sometimes it is a bad idea. Consult with an Elder Law Attorney before executing a Life Estate Deed.