By Sarah Everhart
This is not a substitute for legal advice. See here for the site’s reposting policy.
ALEI legal specialists will once again crisscross the state this winter, in partnership with the Department of Agricultural and Resource Economics, University of Maryland Extension, the Maryland Department of Agriculture, and Nationwide Insurance to provide farm succession workshops (for more information on locations and times of workshops, go to umaglaw.org). Farm succession planning is a complex undertaking which involves legal, tax, and business planning considerations. The agricultural community often uses one succession planning strategy in particular: the life estate deed. Although a useful tool, a life estate deed should be carefully considered before it is put into place.
As explained in this past post, with a life estate deed the owner becomes a life tenant who retains a possessive right in the property for the rest of his or her life and a future right to the property is given to a remainderman who takes ownership of the property after the life tenant’s death. Life estate deeds are favored by those who want to avoid or minimize probate (the process of dividing and retitling assets after death), those who wish to remain in their homes or on their farm until their death, and those seeking to reduce assets for Medicaid planning.
Life estate deeds in Maryland typically come in two forms: with powers to sell the property and without powers to sell the property. An owner who signs a life estate deed and reserves a life estate without powers to sell the property is considered to have gifted the future interest in the property to the remainderman. This gift may have tax consequences (an accountant should be consulted to assess these consequences) and will be viewed, for Medicaid purposes, as the disposal of an asset. To be eligible for medical assistance, an applicant cannot have disposed of assets in the previous five-year period without incurring a penalty. Therefore, the timing of a life estate deed issued for Medicaid planning purposes is very important. By contrast, a life estate interest with the power to sell the property is considered an asset of the life tenant because the tenant has the power to mortgage, refinance, or sell the property during life. While this is a basic outline of asset protection using a life estate deed for the purposes of Medicaid planning, it is always best to consult with an experienced elder law attorney before undertaking this planning.
Trouble can arise in a life estate situation if a life tenant without power to sell needs to mortgage, refinance, or sell the property. In order to take any of those actions, the life tenant must have the signature and agreement of the remainderman. This can be further complicated if more than one remainderman is named.
For example, let’s say Farmer Bob signs a life estate deed reserving a life estate in the farm for himself and giving the remaining interest to his two children, John and Sally. Ten years later Farmer Bob decides he no longer wants to live on the farm and wants to move to Florida and, in order to do so, needs to sell the farm. Unless both John and Sally agree to sell, Farmer Bob is out of luck. This limitation also comes into play with regards to long-term care. A life tenant who requires long-term care not covered by Medicaid may be left with no ability to borrow or sell property to pay for long-term care.
Another potential pitfall with a life estate deed can occur if one of the parties to the deed becomes disabled and is unable to sign. Therefore, it is good practice for parties to a life estate deed to also execute a power of attorney. For more information on powers of attorney, check out this past post.
While life estate deeds can be useful in farm succession planning, given the potential pitfalls, the use of these deeds should be discussed with both an attorney and accountant years before the planned succession will take place.