Senior homeowners frequently want to know how to “protect” their home for the family. Some are inclined to make an outright transfer of real property to other family members (usually, their adult children).

While asset protection is a legitimate concern, some methods are better than others.

There is tremendous risk when transferring outright ownership of the home to other family members, and there are possible harmful tax implications.

A preferable method of transfer is called a life estate deed.

A typical life estate deed legally transfers future ownership in real estate to identified family members, and reserves the right of current ownership in the person(s) making the conveyance.

This is different from the outright transfer of property, where no strings attach to the conveyance.

A life estate is similar to the concept of a timeshare. With a timeshare, a person owns the right to use property during a designated period of ownership. An owner of a life estate has the right to live in the property for his or her lifetime.

The lifetime right of use and enjoyment automatically terminates upon death of the life tenants and automatically transfers ownership to the persons designated in the deed, who then become outright owners.

Life estate deeds are used for both traditional estate planning and Medicaid planning purposes.

There are at least eight reasons for using the life estate deed as a planning tool:

  1. Keeps the home out of probate and transfers ownership to heirs upon death;
  2. It is a less expensive tool than a revocable living trust;
  3. You, as life tenant, retain the right to continue living in the home for the remainder of your life;
  4. You retain the ability to get a stepped-up basis at capital gains upon an eventual sale of the home after your death. In other words, your heirs receive the same tax treatment as if the property passed to children at death with a stepped-up basis;
  5. It is an asset protection tool for the home if you want to plan against losing the home if there is ever nursing home placement; there is a shortened Medicaid penalty period and avoidance of Medicaid liens;
  6. The parent owners (not the heirs) remain legally responsible for all taxes, insurance and maintenance on the home.
  7. The life tenant(s) still qualifies for homestead property and senior citizens tax exemptions;
  8. The current creditors of your heirs can make no claim on the property, so that your right to live in your home is always protected no matter what happens to your heirs during your lifetime.

Rebekah N. Freeman is an associate attorney with Elder Law & Estate Planning Center.