A life estate is an arrangement through which you can transfer to another person your home (or other real property) and keep the right to live there for the rest of your life. This does keep your home out of probate and can allow you to do very limited (but potentially risky) Medicaid planning on this particular asset to save it from the costs of a nursing home. However, be aware of the disadvantages because they are very severe:

1. If consideration is made for qualifying for Medicaid (a form of welfare for people with very limited assets and income) to pay for the costs of a nursing home the State of Ohio Department of Human Services (the Ohio agency that administers Medicaid) will compute the value of the life estate by taking the value of the home and multiplying it by a factor based upon your age and then considering the resulting value as a available asset to you. This means that you would be expected to rent or sell that right to occupy your home or else it would be considered a disqualifying asset for the value of the life estate divided by approximately $3,000.00 (Medicaid's cost for paying for your nursing home stay each month). For example:

Your house is worth $100,000.00. You are 75 years old at the time you apply for Medicaid.

The calculations are as follows:

$100,000.00 X 0.52149 = $52,149.00. (0.52149 is the factor for a 75 year old)

$52,149.00 is the value of the life estate.

$52,149.00. ÷ $3,000.00 = approximately 19

Unless you rent or sell your life estate and use the money to pay for the cost of the nursing home you will be ineligible for Medicaid for at least 19 months.

2. Medicaid has a three year look-back on outright transfers (here it would be to transfer your home without a life estate) before eligibility is considered. That means that if you make this transfer now and then have to go into a nursing home, for example a year from now, the Department of Human Services will disqualify you from Medicaid for the value of the transfer (your house) divided by approximately $3,000.00. In the above example it would be: $100,000.00 ÷ $3,000.00 = approximately 33 months of ineligibility. Considering that the average stay in a nursing home is 2.5 years you may never be eligible for Medicaid.

3. There are other risks associated with this type of ownership. There can be gift and/or income tax problems. Gifts through outright transfers, joint ownership, or life estates do not receive full "stepped up" basis, resulting in heavy capital gains taxes. When a co-owner is added (joint ownership) you lose full control over that asset. Your chances of being named in a lawsuit or having the co-owner's share of the property attached from a creditor's lawsuit are greatly increased. This is particularly true where you have joint ownership with your children or a life estate. If one of your children is married and later divorces, your former son-in-law or daughter-in-law can try to claim part of your property as part of the divorce property settlement.

4. With real estate, to sell or refinance the property, all owners and owner's spouses, such as your daughters-in-law and sons-in-law, must agree and sign, because under Ohio law there is a rule called Dower Rights. Under Dower Rights, any transaction involving real property that could affect the interest of the spouse of a property owner must be approved by that spouse. This could result in you not being able to get refinancing if your daughter-in-law or son-in-law refuses to sign.

Life estates and other types of ownership do have their place under very limited circumstances. Before you go into any type of joint ownership with anyone other than your spouse please consider the potential problems.