Home Ownership and Deeds for Estate Planning
For many Marylanders, their home is the single largest and most important asset in their family. The family home is not just a major economic resource that can be used to build wealth, it is often the emotional cornerstone of the family. If a homeowner raises a family in the home, there is a lifetime of cherished memories, and it becomes extremely important that the home – and the memories – stay in the family for future generations. The best way to ensure this is through proper estate planning.
CAUTION: This article cannot go into all of the potential issues related to the transfer of home ownership. Consult with an attorney before taking any action related to changing the deed, so that your attorney can review your specific circumstances and planning needs.
What is the best estate planning option if you own a home?
The best approach for a homeowner is to take the proper estate planning steps to ensure that the property is left to an heir. This can be done through changing the ownership of the property, leaving the property to your loved ones in your Will, establishing a Revocable Trust, establishing an Irrevocable Trust, or through a life estate deed, as outlined below. (See section on Property Ownership and Titling above.) One should not assume that adding a family member to the deed to the home is the best thing to do. As discussed more below, there are several options to consider, and the best choice depends on each person’s unique situation. Therefore, it is best to seek legal advice before making any change to the ownership of your home.
What happens if no estate planning is done before the homeowner dies?
If a homeowner dies without taking any of the estate planning steps that are discussed here, title to the home will remain in the deceased’s name and will be subject to the rules of probate. (See the article on Wills and Other Property Transfer Documents.) If the home does not pass through probate, then title and ownership of the home may not be transferred to heirs. This may be true even where an heir remains in the house and continues paying a mortgage and other expenses. This means that without proper estate planning, the child who may be incurring the expense of keeping the home may never receive ownership of it following the death of the parent. Also, as a result of the child not being the legal owner, there are several extremely beneficial programs out there – homeowners tax credits, utility assistance programs, and repair assistance grants – that are inaccessible to the child. This could cause severe financial hardship, which may make it even harder to keep the property in the family and avoid foreclosure.
How is a deed different from a life estate deed?
A “deed” is the document that conveys ownership of real property – land and buildings. A “life estate deed” is one that reflects ownership of your home, but which limits your ownership to your lifetime. In other words, a life estate deed allows you to own a property while you are living, and gives it to the people you name (legally called “remainderman”) after you die. It is a way to own your home during your lifetime while allowing ownership to pass to the people you have named in the deed without probate. (See the article on Wills and Other Property Transfer Documents.) Both individuals and married couples can use life estate deeds.
Do I give up control of my home with a life estate deed?
You can, but you do not have to. There are two kinds of life estate deeds, “life estate without powers” and “life estate with full powers.” In one you give up control over what happens after you die, and in the other you don’t.
In a “life estate without powers” deed, you do give away all rights to your home after you die as well as many present-day rights associated with your home. It is a gift now of the right to your home in the future, which means you do not have the power to sell or mortgage the property without the consent of the remainderman. Because you cannot undo the life estate deed without the consent of the remainderman, you should not sign a life estate “without powers” deed unless you are absolutely convinced that you want to make a permanent gift of your home that you cannot change.
A life estate “with full powers” deed lets you change your mind. It is like a gift that happens automatically in the future at the time of your death. You have given away the house after your death, but you have kept the power to change your mind and take it back, sell it, borrow against it, give it to someone else, or do anything else the owner of a house can do. But if you do not do any of those things, then the deed will take effect when you die.
How is a life estate deed different from a Will?
A Will is your present statement of how all of your property should be distributed after you die, but it does not operate automatically. It tells the person responsible for your estate – the property you owned at death – who gets what. (That person is called the personal representative.) However, creditor and tax agency claims get paid first. All of this goes through the process known as probate, where a court supervises the personal representative’s conduct in administration of the estate. (See section on Wills and Other Property Transfer Documents above.)
A life estate with full powers deed is a little like a Will in the sense that you can change your mind. But unlike a Will, in the case of a life estate with full powers, the gifting of your home takes effect automatically on your death; probate courts are not involved, nor is the house exposed to your creditors.
On the other hand, a life estate deed without powers actually gives away the property to your named “remainderman,” but the gifting of the property does not actually happen until the moment of your death. You can’t take it back and you cannot undo it by yourself. No further action is required – or allowed. Creditors do not have a claim on it (except for the mortgage holder and some others).
What happens if I own my home with a life estate deed and need long term care from Medicaid?
Life estate deeds present unique and specific problems for persons applying for Medicaid, which is a “means tested” program intended to provide benefits for only poor and lower income individuals. To determine eligibility for Medicaid, a person’s assets are identified, valued, and calculated to determine the amount of financial resources, if any, that should be used to pay for your medical care before Medicaid pays the rest. In calculating your available assets to determine the amount that you should be responsible to pay for your own care, Medicaid will include in that figure the value of any real property (house) that is not determined by Medicaid to be an “exempt home.” Reasons to designate real estate as an “exempt home” include yourself, spouse, or disabled child currently residing in the home. In the case of a life estate with full powers deed, Medicaid will deny “exempt home” status in some situations (neither you nor a spouse or disabled child is living there), meaning that, to become eligible for Medicaid benefits, you will be forced to either sell the house and “spend down” the proceeds or put the house back in your name, undoing the benefit of a life estate deed. A “spend down” is a financial strategy in which you work with an attorney qualified in Medicaid planning to qualify for benefits.
In the case of a life estate without powers, your eligibility for Medicaid will be delayed if you seek benefits within five years of signing the deed. The reason for this being that Medicaid will likely view this transfer of your home to another person as deliberately impoverishing yourself to qualify for benefits because you gave away the remainder without getting anything in return. If you apply for Medicaid more than five years after you signed the deed, Medicaid benefits would not be delayed because of the transfer. That is not to say you can’t or shouldn’t use a life estate if you anticipate needing long term care, only that you need to understand what does and does not work to achieve your goals. Seek competent legal assistance before transferring any home or other assets, especially if you have concerns about current or future Medicaid eligibility.
Are there other ways to avoid probate of your home?
Yes, but they may be more expensive and may create other problems. For example, you could hire a lawyer to prepare a revocable trust to hold your home until your death and then pass it on to those you chose. Or you could put your home into joint ownership with the person (or people) you want to take the house after you die. (See the article on Property Ownership and Titling.) These options can be costly and complicated. Please consult a lawyer before considering these or other options.
Should I add my child’s (or other person’s) name to the deed of my home?
It depends. However, always be mindful that adding a person as an owner of your home may have unintended consequences.
Adding another person as a joint owner of your home can be risky because you may not be able to change your mind about your home’s ownership without the consent of the joint owner once you have given that person an ownership interest in the house.
You may lose certain property tax exemptions that are available only to you and be disqualified from certain public benefits you would otherwise be entitled to if you had not added another person to the deed.
There may be certain transfer or recordation taxes which need to be paid for this transfer depending on your relationship to the person you are adding to the deed.
If the person you add to the deed owes money to a creditor, and the creditor has obtained a judgment against that person, the creditor may force the sale of your home to satisfy that person’s debt.
Adding someone to your deed may cause that person to pay additional taxes that may have otherwise been avoided if the home had been inherited by them upon your death.
This article was adapted from the Life and Health Planning Handbook created by the Life and Health Planning Committee of the Maryland Attorney General's Covid-19 Access to Justice Taskforce.