Life Estate Deeds and Irrevocable Trusts are two ways to transfer property to loved ones. Both are estate planning tools that can shield property from Medicaid Estate Recovery and bypass probate. However, there are important differences between the two.
A life estate deed is a legal document that allows a property owner to reside in and use their home for the rest of their life, while transferring ownership at their death to a beneficiary (remainderman). This type of real estate deed bypasses probate court and secures the home for the beneficiaries while protecting the life tenant’s right to live there. Life estate deeds cannot be changed without the permission of the beneficiaries, and the property cannot be sold or refinanced without consent. If the property is sold, the owner may not be entitled to the full proceeds, and may lose tax exemptions.
An irrevocable trust is another type of legal document, in which the grantor (owner of the property) transfers it to the trust, to be controlled by the trustee. These trusts, often called Medicaid Asset Protection Trusts (MAPTs) cannot be modified except with beneficiary permission or court approval. If a property within an irrevocable trust is sold, the sale proceeds can remain in trust for the grantor’s benefit. Irrevocable trusts should not be confused with living trusts (revocable trusts), which are revocable and do not provide as much creditor protection.
Both life estate deeds and irrevocable trusts are estate planning tools that can shield a property from Medicaid estate recovery and bypass the probate process. Both are subject to Medicaid’s five year look-back period. However, there are key differences. If a beneficiary of a life estate goes bankrupt, the subject property may be at risk. This is not the case for a property in an irrevocable trust. There are also tax benefits to an irrevocable trust that cannot be obtained with a life estate.
To determine which legal arrangement is best for you, it is important to visit an estate planning attorney or an elder law attorney to receive qualified legal advice. Property transfers can be complicated and problematic, so it is very important that you receive counseling on your legal rights as a property owner and your options. At QMC, we provide a free consultation to help your family plan for Medicaid and other long-term care options.