As a Rhode Island and Massachusetts estate planning attorney, I frequently work with clients interested in protecting their house from nursing homes and Medicaid. Since neither a Massachusetts Homestead exemption nor a Rhode Island homestead will help in this regard, a life estate is a popular method of achieving some measure of protection. With a Rhode Island or Massachusetts life estate, the owners add new parties – typically one or more of the owners’ children – to the deed. The owners retain the right to live at the home for as long as they wish, and the added parties automatically receive title to the house upon the owners’ death. Once a home has been in a “life estate” for 5 years, the original owners are no longer considered the “owners” of the property for nursing home and Medicaid purposes. Thus, if one or both of the owners require long-term nursing care, the owners’ home equity is protected.
While a life estate has obvious benefits, most of my Rhode Island and Massachusetts estate planning clients are initially unaware of the downside to life estates. First, any parties added to the deed (usually one or more children) must literally sign off on any sale, mortgage, or lease of the home. If the owners want one thing but the added parties want something else, nothing can get done until the parties agree. Second, if the house is sold while in a “life estate,” the added parties are liable for capital gains taxes, which can be quite expensive. The original owners will typically avoid paying capital gains on the sale, but the added parties will not. When the home is sold after the original owners are deceased, the added parties receive a “step up” in tax basis and avoid capital gains. That benefit does not exist, however, when a party holding the “life estate” is still living.
Therefore, in my Rhode Island and Massachusetts estate planning practice, I advise clients to think long and hard before creating a life estate for their home. If my clients think they are likely to sell the home at some point in the future, they must consider the capital gains tax implications of having children or other parties added to the deed. They must also remember that once the Rhode Island or Massachusetts life estate is created, they must have the added parties’ written consent for any sale, mortgage or lease. These considerations must be weighed against the estate planning benefits of creating a life estate. Once homeowners carefully assess the life estate’s benefits and drawbacks, they can make an informed decision that best fits their life circumstances.