By Bernard A. Krooks, Esq.,
Certified Elder Law Attorney
When a loved one becomes ill, there are many issues that must be dealt with. First and foremost are decisions regarding the person’s health and the type of care needed. This may not only cause the ill person a great loss of personal autonomy, but also a tremendous financial expense. The potential loss of significant personal assets due to the catastrophic cost of taking care of someone with a chronic illness can be devastating.
For many of us, our primary asset is our home. There are a number of ways to protect one’s home when discussing long-term care planning; however, there are many issues that must be considered when choosing the appropriate option. How the property is titled; the potential tax ramifications if sold and possible liens are all issues that must be addressed before deciding which option is best.
The home may be owned in one person’s name alone or it may be held jointly with another person(s), affecting his ability to engage in planning options. There are a number of ways to own property along with another person. The property may be held as tenants in common, meaning each person has an undivided interest in the whole property. The respective interests of each owner may be different. Thus, one person may have a 60-percent interest in the property and the other co-tenant might have a 40-percent interest. During the lifetime of the owners, a co-tenant of the property can sell his interest in the property without the consent of the other co-tenant. Upon the death of one of the property owner’s, his share would be conveyed to persons designated in his will, or, according to state law if the property owner dies without a will. Therefore, it is entirely possible that the original co-tenant would not end up owning the entire property but, instead, would own the property with someone else, perhaps someone who they do not even know.
Conversely, a home may also be held jointly with rights of survivorship, giving each owner an equal share in the property. In this case, when one of the owners dies, the remaining owner(s) will inherit the other’s interest. The joint tenancy with rights of survivorship will take precedence over any contrary intentions expressed in a last will and testament or otherwise. During the lifetimes of the joint tenants, the consent of all joint tenants must be obtained prior to selling the property. If consent cannot be obtained, then it may be necessary to bring a partition proceeding in order to be able to dispose of one joint tenant’s interest in the property.
Another form of home ownership is tenancy by the entirety. In most states, this is the presumptive form of home ownership between married persons. Tenancy by the entirety is basically a form of joint tenants with right of survivorship where the two joint tenants are married. This form of home ownership provides added protection against creditors in the event one of the spouses is sued and has a judgment entered against him or her.
Regardless of your form of home ownership, it may be important to you to protect your home in case you need long-term care. For many people, setting up a life estate is the most simple and appropriate alternative for protecting the home. A life estate is a form of ownership of property between two or more people, whereby one (or more) person owns the right to live in the property during his lifetime (the life tenant) and others (remaindermen) receive the property upon the life tenant’s death. Each person has an ownership interest in the property but for different periods of time. The person holding the life estate possesses the property currently and for the duration of his life. The other owners have a current ownership interest but cannot take possession of the property until the end of the life estate, which occurs at the death of the life estate holder.
In a typical life estate transaction, an individual owns a home and conveys a remainder interest to others while retaining a life estate in the home. This ensures that the property goes to the people you want at the time of your death. Retaining a life estate in the property avoids the need for probate with respect to the home as the ownership will automatically pass to the remaindermen. By reserving a life estate, you are ensuring that you have the legal right to live in your home for the rest of your life. You cannot be evicted and the home cannot be sold without your consent.
Another benefit of reserving a life estate, compared to simply gifting your home to your children, is that upon your death the children can sell the property without incurring any capital gains taxes. This is due to a provision in the tax law which provides that the basis of property inherited as a remainderman of a life estate is equal to its fair market value on the date of death of the life tenant. If you were to transfer your home to your children while you are alive without retaining a life estate, then the children would be responsible for capital gains taxes when the property is sold. Capital gains tax is always a relevant consideration when discussing the transfer of your property, given that many of us purchased our homes at a much lower price than what it is worth today. Although your home may not be worth what it once was, it is probably still worth significantly more than what you paid for it if you purchased the home decades ago.
Life estates are also a valuable tool when considering eligibility for Medicaid benefits. Under the laws of most states, a life interest in property is not considered an available resource with respect to someone’s eligibility for Medicaid. Although the conveyance of the remainder interest to your children will be subject to the five-year Medicaid look-back period, the retention of the life estate should not disqualify you for Medicaid benefits. Additionally, on your death Medicaid has no lien or right of recovery against property subject to a life estate in most states.
Your home is your castle; however, without proper planning the home is at great risk if you become incapacitated or require long-term care. By considering all available planning options, you can ensure that your home stays in your family and is passed on to your loved ones.
Bernard A. Krooks, J.D., CPA, LL.M (in taxation), CELA is immediate past President and founding member of the NY Chapter of the National Academy of Elder Law Attorneys and a nationally known and widely quoted expert on elder law. For more information, visit the firm’s website at www.littmankrooks.com.
Source: www.ALZinfo.org. Author: Bernard A. Krooks, Esq., Preserving Your Memory: The Magazine of Health and Hope; Fall 2008.