As we age, we may begin to consider ways of protecting our assets from long term care costs by transferring them to our children. It is important not to rush into any decision without speaking to an estate planning attorney because the legal and tax consequences of doing so are profound. As we discussed in previous articles, one excellent method of protecting assets is through an irrevocable Medicaid trust. However, another common way is by transferring real property to a child or children while retaining a life estate. A life estate allows the senior to continue living in the property for the remainder of their lifetime while still providing for their children. While not as ideal as an irrevocable trust, this arrangement has many benefits for seniors and their children alike.
One of the primary benefits of a life estate is that it allows the senior to remain in their home for the remainder of their life without the worry of eviction or displacement. This can be especially important for seniors who may have lived in their home for many years and have a strong emotional attachment to the property. The senior will still be responsible for the taxes, insurance, and upkeep of the property and will still be able to collect any rent generated from the property.
Upon the passing of the senior, the real property will automatically pass to the remaindermen (usually the child(ren)), thereby avoiding the probate process. This saves the children time, money, and the headache of going through a court process just to transfer the real property.
A life estate can also help to minimize capital gains taxes by providing a step up in basis in the real estate so that your children wont have to pay capital gains tax if they sell the home shortly after your passing. You are also able to retain your STAR, Enhanced Star, and SCHE benefits since New York State will still consider the senior as the home owner for tax purpose.
However, there are significant downsides to using a life estate deed as opposed to a Medicaid trust in order to protect assets. A couple include e the inability to change the beneficiaries as well as the loss of the $250,000 capital gains tax exclusion if the house is sold during the senior’s life.
Before taking such a consequential step, seniors and their children are encouraged to speak to your local NY elder attorney for a consultation regarding the pros and cons in their particular situation. Our law office is available for a free phone consultation to discuss your questions at 347-766-2685.
This article is for educational purposes only - to provide you general information, not to provide specific legal advice. Use of this post does not create an attorney-client relationship and information contained herein should not be used as a substitute for competent legal advice from a licensed local estate attorney in NY or your state.