| A life estate question….read on:
CLIENT QUESTION:
Hi Lawrence – you recently helped my wife and me set up our revocable trusts. My wife’s dad has been living in a home owned by her and her brother under a life estate arrangement. He has recently moved into an assisted living facility, and we would like to offer the house for rent. Is there anything we should be concerned with in doing so?
MY RESPONSE:
A life estate is a form of property ownership. Your father-in-law owned the property and then transferred it to his two children RETAINING a life estate. This means father and children are the current owners of the property, split between the father’s lifetime ownership and the children’s “remainder” ownership at his death. If the property were to be sold right now, the proceeds would be split between the two interests, and there is an IRS table that explains the proper percentages (depending on age and current interest rates). IF this plan was created more than 5 years ago, the property would be effectively protected from Medicaid…as long as the property is not sold during the father’s lifetime. If sold, the life estate value would be available to Medicaid, and the remainder value would most likely be subject to high capital gains tax.
THE MEDICAID AND TAX PROBLEMS ARE WHY LIFE ESTATES ARE NOT USUALLY THE PREFERRED METHOD OF PROTECTING THE HOUSE (solved by the Irrevocable Medicaid Trust). SELLING THE HOUSE DURING THE LIFE TENANT’S LIFE CREATES THESE PROBLEMS…AND IT IS WHY YOU ARE NOW STUCK CONSIDERING RENTING THE HOUSE.
So, what should you now be concerned with as you rent the house? Besides bad tenants and the hassle of maintaining the house…not too much. What you really need to know is that the life tenant (as lifetime owner) is entitled to all the net profit (rent less expenses…like taxes, insurance, and maintenance). Since Medicaid requires that all income (less a small exemption) be applied to your medical expenses, the net income from the rental will be added to all of his other income and applied accordingly. As such is the case, Medicaid will require accurate records of income and expenses…so be diligent in your record keeping.
Longer answer than usual, but I hope this helps. |
