Below is a recent question I responded to regarding using life estates in Medicaid planning, and how the sale of the proceeds is divided when the person holding the life estate is still alive.
Consumer Question:
When a warranty deed indicates "this conveyance reserves a life state for the grantors" (parents)how does sale of property work?
My parents 2006 estate planning included deeding their home to us 6 children via warranty deed with the idea that they would continue to live there. My Dad was moved to a nursing home in January this year. Mom has since passed away. Us children recently sold the property. It was our understanding that the proceeds were to go to only us 6 children due to the estate planning. 25% of the proceeds were made payable to our Dad. This defeats the purpose of the estate planning as now it will go to the nursing home. Was this transaction completed properly?
Attorney Thomas B. Burton Response:
If your Dad reserved a life estate to himself in the deed, then he maintains an ownership interest in the property until he dies. The life estate is calculated according to a factor using his age and life expectancy. If you used a title company for this transaction, then they likely used his age and life expectancy to calculate his share, and paid him the corresponding amount...in this case it sounds like it was 25% of the total. If you had waited to sell the property until after your Dad died, then the proceeds would be divisible only among the children, but since you sold it while he was still alive, he still has an ownership interest in the property. It is possible that you could have set up a special needs trust to receive the proceeds of the sale, but that would need to be done before the transaction was closed. As far as whether this transaction was completed properly, it depends on what your Dad told the attorney (if he used one) when he set up the estate planning. In situations like this, many times irrevocable trusts are a better tool for holding real estate, however the life estate method was a common method used in the past due to its supposed simplicity and cheaper cost as compared to an irrevocable trust. As you can see, there are drawbacks to the easier and cheaper method however, and this is one of them. If the property was owned by an irrevocable trust and structured properly and your father had gone in the nursing home, then he would not have had an ownership interest in the property and would not have had to receive 25% of the sale while he was in the nursing home.
This is not legal advice nor intended to create an attorney-client relationship. The information provided here is informational in nature only. You should seek a consultation with a licensed attorney in your area if you seek a complete review and discussion of your situation.