A planning technique many of our Massachusetts clients are utilizing is to transfer title of their home to their children while retaining a life estate. This means that essentially the elderly parent or parents retain the right to ownership during their lives, and the children automatically have ownership on the death of the parents without probate proceedings. The parents continue to occupy, pay the taxes, insurance and maintenance. The children receive what is called the remainder interest.
The following are advantages and disadvantages, and should be considered thoroughly before making the decision to execute a Deed with reserved life estate:
1. There may be some disadvantages, which include the fact that if you choose to sell the home prior to your death, the children would also need to sign any Deed. A portion of the proceeds would go to the children, and a portion would go to the parents, the amount of which would depend on the age of the parents at the time of the sale. Although the parent's portion of the proceeds of sale would not be subject to capital gains tax as the house is their primary residence, the children's portion of the sale proceeds would be subject to the gains tax.
2. Another drawback is that the parents or parent may be ineligible for Medicaid benefits to provide for long term skilled care of a parent (nursing home care) for a period of five years from date the transfer is made. It is possible to cure the transfer penalty, however, if the children deed back their interest in the house to the parents or parent.
3. The primary advantage of the transfer of the house with a reserved life estate is that the children have title automatically after the death of the parents or parent, and not included in any probate proceeding.
4. Another advantage is that the children would receive what is called a “step up in basis” so that the value of the home is increased to the market value at the date of the parent or parents, which is the same effect as having inherited the property. This means that any capital gain would effectively be eliminated at that point.
5. Lastly, if a parent should ever require nursing care and does qualify for Medicaid benefits (presuming the five year disqualification period had expired), Medicaid would not be able to obtain a lien against the property for benefits paid for the benefit of the parent, commonly called “estate recovery”, as the house would not be included in any probate filing. At this time, it cannot make claims against life estates, but it may try to do so in the future.
It is important to understand that the parents do give up some control of their home, and should have discussions with their children and family members to discuss the implications of such transfers before deciding to Deed the house in this manner.
We serve clients in all counties in Western Massachusetts and on Cape Cod, including, but not limited to the Towns of Agawam, Barnstable, Chatham, Dennis, Hampden, East Longmeadow, Hyannis, Longmeadow, Ludlow, Monson, Palmer, Osterville, Springfield, Wilbraham, Worcester and Yarmouth. Our office is conveniently located at 200 North Main Street Suite 2, East Longmeadow, Massachusetts 01028. Call us today at (413) 525-1119 so we can help you with your estate planning needs.