The life interest is a form of ownership whereby the person transferring the property, usually the parent, retains the right to use, occupy, enjoy and live in the residence. The transfer usually benefits the children, who receive a future interest in the property. This special form of “dual” ownership is not a joint ownership, nor have the parents made a completed gift of the entire real estate to the children. The parents are not able to sell, mortgage, refinance or in any way encumber the property without the consent of the children, and, the children may not transfer or sell the property without the signatures of the parents. To complete this transaction, it involves a deed from the grantor to the grantee, which must be recorded with the Registry of Deeds. Once the deed recording is effective, the children and parents both own an interest in the property.

The benefits to this transaction are threefold. First, the property will not be probated upon the death of the parent. Also, the value of the real estate is included in the taxable estate of the parent for estate tax purposes, even if there is no need to probate the estate. This normally works to the advantage of the children. They receive what is known as the step-up in basis of the real estate.

Secondly, the real estate transfer to the children triggers the waiting period for Medicaid eligibility. This transfer will “start the clock ticking” on the transfer disqualification period, which may be up to three years. However, the state may place a lien on the property, but the lien normally is extinguished upon death of the Medicaid recipient, so long as the property is not sold during the lifetime of the Medicaid applicant. This rule is subject to change, and if it does, one may wish to revise the plan of utilizing this type of transfer.

Thirdly, the person reserving the life estate is entitled to obtain an abatement for real estate taxes if he or she qualifies for the abatement within the city or town.

Whenever there is a benefit, there is also a detriment or down side. In the event that the future interest holder dies, becomes disabled, gets divorced, has tax liens against him or her, or incurs significant liability, then his or her interest in the property may be attached by the creditor. Also, in the event that the child should die, then his or her Will, if not revised, may leave these future interests in the real estate to his or her spouse and/or children.

While this article is not intended to be a complete explanation of a life interest, hopefully it will bring awareness to this often-beneficial means of transferring real estate to the next generation. As always with these types of transfers, it is best to consult a professional who has the expertise in both legal and tax areas prior to making the final decision to transfer the real estate.

Hyman G. Darling, Esquire, Bacon & Wilson, P.C.

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