Building legal structures saves homes

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Paul A. Brule

Legal Corner by Paul A. Brule

As readers of this column know, a major part of our law practice is helping people prepare to deal with the legal issues surrounding getting older, perhaps becoming ill and a separate set of legal issues regarding passing away.

One of the techniques that we share with our clients is known as life estate/remainder restructuring of one’s real estate, which can be a very effective method of protecting a home from risk of loss for payment of nursing home expenses.

In order to comprehend how it works, it is important to start with a fundamental understanding of real estate law. Real estate can be owned by two or more people, and the co-owners can have different arrangements between them regarding their rights to the property.

A common arrangement between co-owners might very well be the traditional arrangements between a husband and wife. Often times that legal structuring is known as tenants by the entirety, but other arrangements are possible.

Another example of a legal structure between co-owners is known as joint tenants, and a third example is known as tenants in common. A life estate/remainder is simply another type of legal arrangement between co-owners.

The best place to start when trying to explain a life estate is with the example of a single person owning 100 percent of the real estate. As is easily understood, that person could give away half the property to another person, and then the property would be owned by the two of them. A completely different example would be that the sole owner of the property could give away certain rights. A good example of that would be leasing the property for a year, and another would be granting an easement for a driveway, high tension wires or another purpose.

Creating a life tenant/remainder arrangement is most similar to that final example. The difference is in what is given away. The answer is the right to control the property after the owner passes away. That right would belong to the person referred to as the remainder interest. All that the prior owner would have kept would be referred to as a life estate.

The owner of the life estate would have the right to live on the property or rent it. Such rights come with certain responsibilities, including the payment of taxes and insurance as well as maintenance. But the owner of the life estate would no longer have the right to control who became the owner after his or her passing. Because that individual no longer controls such right, it would be impossible for the owner of the life estate to mortgage the entire property or sell the entire property since the owner of the life estate only owns part of the rights. If the owner of the remainder interest agreed to a sale, then the sale of the whole property would be possible, but the owner of the remainder interest would be entitled to a share of the proceeds.

How that share is determined is based upon the life expectancy of the owner of the life estate. The older that person is the less the individual’s life expectancy is, which decreases the value of his or her share of the property and increases the value of the remaining interest. Several government and private organizations publish tables breaking down those values on a year-by-year basis based on the age of the holder of life estate.

Setting up such an arrangement constitutes an uncompensated transfer, sometimes referred to as a gift, for purposes of the traditional Medicaid five-year look back rule. In addition to the loss of completecontrol, there are also potential adverse capital gains taxes if the property is sold prior to the death of the holder of the life estate. Because of those disadvantages, one should consider alternatives, which are available to accomplish similar results. Performing such analysis is best done with the help of trained and experienced legal advisers.

Paul A. Brule is an attorney with the firm of Walsh, Brule & Nault, P.C., in Cumberland. He can be reached at (401) 334-4545.

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