Last week I met with a delightful couple in their early 80’s with a big problem. Over 10 years ago, at the urging of their four children, these folks transferred to their kids a so-called “remainder interest” in the parents’ home. The parents kept a “life estate” in the property, which left them with control of the property (and responsibility for all house expenses, like taxes, insurance and upkeep), until they die. They did this, like many aging parents do, as a way of protecting their home for the benefit of their kids if the parents needed to qualify for MassHealth later, because one of them needed nursing home care. This all works and is great for the children. Five years after the deed conveying the remainder interest has been recorded in the Registry of Deeds, the remainder interest is no longer considered an asset of the parents for MassHealth purposes. If one or both of the parents later needs to qualify for MassHealth, any MassHealth lien imposed on their “life estate” will expire after they die, leaving the children able to sell the house free of any MassHealth lien. In addition, because the parents retained a life estate in the property, the tax basis of the property “steps up” to the value of the property when the second of the two of them dies, so the children, when they later sell the property, will probably pay little or no capital gains tax.
The couple’s problem, though, is that they can no longer afford to live in their home on their current income, and they want to sell, move to an apartment, and use the proceeds as their cushion for the rest of their lives. For them to do that, their children either need to agree to deed their “remainder” interests back to their parents, or the children need to agree to deed the property to a new buyer at the same time their parents do, and presumably give the parents the proceeds that technically belong to the children for the value of their remainder interest. If the parents are now 80, the remainder interest will be worth about 82% of the proceeds. Three of the children will agree to participate. One of them won’t. What can they do? Regrettably, just about nothing. While there is a legal action that they could take to have a Court order the sale of the property, the legal action itself will cost tens of thousands of dollars and takes a considerable amount of time, and, as the owners of only a life estate in the property, they will only be entitled to the percentage of the proceeds equal to the value of their life estate, or about 18% of the proceeds. What’s more, the 82% of the proceeds that their children get will be subject to capital gains tax. The children cannot take advantage of the homeownership capital gains exemption, because the children do not live there. Only the parents’ life estate proceeds are protected by the homeowner exemption on capital gains taxes.
What are their other alternatives? They could apply for a reverse mortgage loan and use the loan proceeds as their cushion, but they will still be stuck maintaining a house where they can no longer afford to live, and of course, this would only work if all the kids would sign the reverse mortgage along with the parents. These cases are uncommon, but they do come up, so think about this before you give away that remainder interest. There may be worse things than a MassHealth lien. There are also other options to consider, such as giving the remainder interest to a trust rather than outright to children. The parents could name as the trustee the child they trusted the most. Then, if they needed to sell the house, the trustee would be the only one who needed to consent to the sale.