Many estate planners recommend that a family use a life estate deed to pass their residence, vacation home, or family farm to one's children. For estate planning purposes a life estate deed with powers is used to avoid the probate process. This deed allows the person who lives in the property or utilizes the property to have total control of the property during their lifetime. They can change the deed at any time they desire or sell the property when they wish. They can remove the ultimate beneficiary or totally change that beneficiary since they have the full power to control the property up until their time of their death. This is a particularly useful estate planning vehicle when you have properties in multiple states or you have a specific family member or members that you want to leave the property to at the time of your passing. This type of deed does not in any way protect the property from a long term care stay.
From an eldercare perspective, there is a tool known as a life estate deed without powers that many families use to allow the owner of the property to live therein while providing that the property will flow directly to the stated beneficiaries at the time of their death. At the same time, the owner transfers the remainder interest to certain named beneficiaries. This means that they have literally bifurcated the property and have given away the right to control the disposition of the property during their lifetime or at the time of their death. By implementing this type of deed they have made a transfer for less than fair market value of what is known as the remainder interest. The property is still fully includable in their estate at the time of their death which allows them to pass a new full step up in cost basis to their heirs. By giving away the remainder interest, they start the Medicaid time clock ticking. The transfer takes place at the time that the deed is signed. If the owner [life tenant] enters the nursing home at a point in time in the future, then to qualify for Medicaid they must wait until five years from the date of the transfer in order to qualify for benefits without triggering a transfer penalty. In many cases, it is wise to implement a deed of this nature while the life tenant is in good health so that the fivenyear look back period can be completed prior to their need for a long term care stay.
This is a particularly good tool to utilize for a business property, a family farm and/or vacation home. It is important to remember that the life tenant cannot compel the remaindermen to return the remainder interest to the life tenant when they utilize a life estate deed without powers. Both a life estate deed with or without powers will be fully includable in the property owner's estate. The family will also receive a new increased cost basis for the property at the time of the owner's death. The major difference between these two types of deeds is that the life estate deed without powers starts the Medicaid five year look back period when signed and the life estate deed with powers does not.