All Massachusetts seniors have an interest in protecting their assets against reclamation by the state when they obtain Medicaid benefits. Those with a good estate plan have weighed the benefits and risks of a deed with a life estate as an asset-preservation option, and those who exercised this option have enjoyed the comfort of knowing their home is safe.
Recently, however, Gov. Mitt Romney decided to make life estates attachable. The legislature voted to appeal his decision, but Romney vetoed the repeal, and now it is expected that a vote on the repeal will occur in January. If successful, this will override Romney’s veto and postpone the security of life estates until next July. One way or the other, seniors are now being forced to reevaluate their life estate decision and perhaps take additional steps to preserve their homes, while maintaining all tax benefits, to the maximum extent possible.
The life estate is merely a form of ownership whereby the person transferring the property, usually the parent, retains the right to use, occupy, enjoy, and live in the residence. The transfer usually occurs to the children, who receive a future interest in the property. This special form of “dual” ownership is not a joint ownership. However, the parents are not able to sell, mortgage, refinance, or in any way encumber the property without the consent of the children, and vice versa. The procedure to complete this transaction involves a deed from the grantor to the grantee, which must be recorded with the Registry of Deeds. Once effective, the children own an interest in the property, as well as the parents.
The transfer of the real estate to the children triggers the waiting period for Medicaid eligibility, currently three years. This transfer starts the clock ticking on the waiting period, which may be increased up to five years. Healthy seniors can currently transfer their estates, survive the waiting period, and be exempt from having their homes attached in the event that they subsequently utilize Medicaid benefits.
The pending legislation will alter the security of putting individuals’ homes into life estate by making them attachable under Massachusetts law. This will greatly impact the estate plans of many seniors. To remain one step ahead of the Legis-lature, alternatives are now being considered. One technique is to release the life estate, meaning transferring the house to the children outright. Of course, this is not likely an option for people who may fear lack of control over their own homes.
Another option worth consideration is a ‘use and occupancy’ agreement. Children own the home outright; however, parents reside there under the terms of a structured and binding lease, which dictates specific terms. The lease would likely include a designation that the parents are responsible for all maintenance and costs associated with the home throughout the length of their continued occupancy. The downside to this type of agreement is the same set of risks to the parents’ home as with a life estate. In the event that the future interest holder dies, becomes disabled, gets divorced, has tax liens against him or her, or incurs significant liability, then his or her interest in the property may be attached by the creditor having such a claim.
Also, in the event that the child should die without a revised will, future interests in the real estate may pass to his or her spouse and/or children. If this person dies without a will, substantial adverse consequences may result. In addition, if the property is sold during the lifetime of both parties, there may be a capital gains tax assessed against the children for the gain that they receive as a result of the sale.
All in all, a life estate remains a viable option in many circumstances. Its existence may have significant beneficial tax consequences, in addition to other benefits. The deed with a life estate will also eliminate the need for probate upon the death of the parent. At that point in time, the child, who owns the future interest, becomes the property owner as a matter of law, without the need to probate the estate. Although the value of the real estate is included in the estate of the parent for estate tax purposes, children currently inherit the property at the date-of-death value.
When a person in Massachusetts dies owning real estate, an automatic lien is attached to it. This must be released by the filing of an estate tax return within nine months of date of death or by an affidavit if no tax return is due. This is usually a formality if there is no tax due, but it is necessary to clear the title of the property for the children. If the parents’ total assets exceed the estate tax credit for estate tax purposes, then the value of the estate, including the real estate, will cause an estate tax to be due.
Another benefit is that the elder person who reserves the life estate will be entitled to obtain an abatement for real estate taxes if he or she otherwise qualifies for one within the city or town. There is an income test, as well as an asset test, in order to qualify for this exemption, but it is preserved so long as the person living in the house (the grantor) reserves the life estate.
While the life estate is currently considered to be a beneficial means of transferring real estate to the next generation, the governor’s recent moves to attach it relative to Medicaid benefits are causing widespread worry among Massachusetts seniors. Concerned seniors are advised to contact their representatives and voice their opinions within the next few weeks, before the expected January vote on the veto override. In any event, this serves as a wake-up call to all seniors to review their estate plans and discuss available house-preservation options with their advisors.
Hyman G. Darling, Esq. is chairman of Bacon & Wilson’s Estate Planning/Elder Law Department. His areas of expertise include all areas of estate planning, probate, and elder law; (413) 781-0560; firstname.lastname@example.org.