More on Life Estates

There are two different types of life estates. The first is called “life estate with powers”. As discussed last week, a life estate can allow a person to live in the home while transferring eventual ownership to children, for instance, when the homeowner passes away. The “life estate with powers” gives the owner the right to change his mind if he decides he does not want to leave the property to the individuals named in the deed, or if he wants to sell or otherwise dispose of the property before he dies. Simply put, the term “with powers” means that the homeowner is not giving up the potential to exercise full power over the real estate by changing his mind.

The second type of life estate is known as “without powers”. That means that the life estate transferring eventual ownership to someone else is an irrevocable transfer. That is to say, unlike a life estate “with powers”, this type of life estate does not allow the homeowner to change his mind once the life estate deed is signed.

Because of these differences, a life estate with powers would appear to be the best way to go. However, there is a glaring exception. And that is if a person contemplates being on Medicaid, retaining a life estate with powers would affect the person’s eligibility for Medicaid. That is so because the real estate would be considered an asset of the Medicaid applicant since he has ultimate control over the real estate. By contrast, a life estate without powers, since it is an irrevocable gift, means that the only ownership interest that the applicant has is the right to live in the property. The value of that interest is considerably less than, for instance, the power to sell the real estate.