Paul O. Dillon, Attorney at Law

Lacking a Strong Estate Plan, Family Battle Destroys Farm

Farms passed from generation to generation require careful estate planning to keep them in the family. Without a good estate plan, the property becomes the subject of estate battles, family fractures and even forced sales. The recent article, “How Inadequate Estate Planning Led to Likely Sale of Family Farm” from Morning Ag Clips, explains what happened to one family.

A mother who owned a farm left a will that gave life estates to her son and daughter, and upon their deaths, the will directed their respective shares to pass to their children. The son’s share would pass to his two sons and the daughter’s share would go to her own daughter and son. The mother and the son passed away and the son’s two boys weren’t interested in farming. They filed a lawsuit to partition the farm and divide the proceeds. Partition refers to a court-ordered process for dividing jointly owned property when co-owners can’t agree on its sale.

The surviving sister (their aunt) objected, as she was still alive, still owned her life estate in half the property and lived on the property. She maintained that the property could not be partitioned until after her death. The court, however, found that the mother’s will created a tenancy in common between the siblings rather than a joint tenancy with the right of survivorship. When the brother passed away, his sons inherited his half of the farm. The court ruled that they had a legal right to seek partition of the entire property despite their aunt still being alive and living on the farm.

If the two sons move forward, their aunt faces a tough choice. She can buy them out if she has the funds to do so, or the entire property will be sold. If it’s sold, she will lose her home and the family legacy at the same time.

Here’s how a better estate plan could have prevented this scenario:

Survivorship protections. The will could have created a joint survivorship life estate, so that upon the first sibling’s death, the other would have inherited full ownership. This would have delayed the transfer to the next generation until the second sibling had passed.

Using a trust. Instead of using a life estate and the remainder through a will, the farm could have been placed into a trust, which would have provided more specific directions on how the farm was to be managed, utilized and distributed across generations.

Using an LLC. The mother could have transferred the farm into an LLC (Limited Liability Company) and heirs would have inherited the LLC. Provisions could have been added to prevent partition and allow the farm’s sale only if at least a majority of the family agreed to the sale.

Maintaining multi-generational entities, such as family farms, closely held businesses, real estate and other assets, requires skilled estate planning. To keep a farm or business in the family requires an experienced estate planning attorney with knowledge of how to protect both short-term and long-term goals.

Reference: Morning Ag Clips (March 6, 2026) “How Inadequate Estate Planning Led to Likely Sale of Family Farm”

What’s the Best Way to Pass the Family Home to Heirs?

One family wanted their daughter to have the home where she grew up. They gave it to her as a gift.  However, they continued to live in it until their deaths. With the help of an estate planning attorney, the process was handled outside of their will, according to a recent article from Newsday, “Wills, trusts, sales: How Long Island parents pass houses to kids.” This ensured that the house didn’t go through probate, which can be costly and time-consuming.

In a real estate market where prices and interest rates keep rising, parents are taking steps to keep their homes in the family, building generational wealth and creating a legacy of stability. However, how this is accomplished can have consequences, especially regarding Medicaid eligibility and taxes.

The best of circumstances is when parents can hand down a home they own outright, with no mortgage or a small mortgage. When property is transferred from one owner to another, the bank or mortgage lender can demand the full mortgage payment. While the parents could continue to pay the mortgage, the lender could still demand full payment once ownership transfers.

If the mortgage company decides to demand full payment, the mortgage cost could go up dramatically, since interest rates today are higher than they were ten years ago.

Leaving a home to a child in a will is the most common way to pass the house to the next generation. If the children decide to sell the house, the basis is the value of the house at the time of the parent’s death. Beneficiaries named in a last will and testament get a stepped-up basis. This means the capital gains the heir incurs are based on the home’s value at the time of the parent’s death. The value of the home when the children decide to sell could be far higher. However, the gain is erased for tax purposes for the heirs, which is a significant saving.

If children decide to keep the house for a while, they should get an appraisal or comparative marketing analysis to prove the home's value at the time of death. If the house is sold many years later, they must confirm this value to use the stepped-up basis.

If the house remains in the parent’s name while they are living, the children may face an issue if the parent needs to apply for Medicaid for long-term care. Medicaid could deny coverage if the house is in the applicant’s name, no spouse is living in the home and the applicant’s equity is higher than the current $1.071 million limit. Medicaid might still pay for long-term care if someone owns a home under the limit and is otherwise eligible. However, it could claw back money from the Medicaid patient’s estate after they die.

Gifting a house is another way to transfer ownership. Parents can sign deeds and gift the property.  However, this needs to be done with the lifetime federal gift tax exemption in mind. While the $13.16 million level is one most people don’t need to worry about, it’s a factor for wealthy people.

Other options for transferring a home include using revocable or irrevocable trusts and transferring homes by signing over a deed while retaining a life estate on the deed, which allows parents to remain in the home as long as they live.

The best way to transfer a family home to the next generation starts with consulting an estate planning attorney to review the options. Family dynamics, tax planning and Medicaid all need to be considered. Just as with all things concerning estate planning, the best plan is to put a plan into place long before it’s needed.

Reference: Newsday (May 2, 2024) “Wills, trusts, sales: How Long Island parents pass houses to kids”

What’s the Best Way to Pass the Family Home to Heirs?

One family wanted their daughter to have the home where she grew up. They gave it to her as a gift.  However, they continued to live in it until their deaths. With the help of an estate planning attorney, the process was handled outside of their will, according to a recent article from Newsday, “Wills, trusts, sales: How Long Island parents pass houses to kids.” This ensured that the house didn’t go through probate, which can be costly and time-consuming.

In a real estate market where prices and interest rates keep rising, parents are taking steps to keep their homes in the family, building generational wealth and creating a legacy of stability. However, how this is accomplished can have consequences, especially regarding Medicaid eligibility and taxes.

The best of circumstances is when parents can hand down a home they own outright, with no mortgage or a small mortgage. When property is transferred from one owner to another, the bank or mortgage lender can demand the full mortgage payment. While the parents could continue to pay the mortgage, the lender could still demand full payment once ownership transfers.

If the mortgage company decides to demand full payment, the mortgage cost could go up dramatically, since interest rates today are higher than they were ten years ago.

Leaving a home to a child in a will is the most common way to pass the house to the next generation. If the children decide to sell the house, the basis is the value of the house at the time of the parent’s death. Beneficiaries named in a last will and testament get a stepped-up basis. This means the capital gains the heir incurs are based on the home’s value at the time of the parent’s death. The value of the home when the children decide to sell could be far higher. However, the gain is erased for tax purposes for the heirs, which is a significant saving.

If children decide to keep the house for a while, they should get an appraisal or comparative marketing analysis to prove the home's value at the time of death. If the house is sold many years later, they must confirm this value to use the stepped-up basis.

If the house remains in the parent’s name while they are living, the children may face an issue if the parent needs to apply for Medicaid for long-term care. Medicaid could deny coverage if the house is in the applicant’s name, no spouse is living in the home and the applicant’s equity is higher than the current $1.071 million limit. Medicaid might still pay for long-term care if someone owns a home under the limit and is otherwise eligible. However, it could claw back money from the Medicaid patient’s estate after they die.

Gifting a house is another way to transfer ownership. Parents can sign deeds and gift the property.  However, this needs to be done with the lifetime federal gift tax exemption in mind. While the $13.16 million level is one most people don’t need to worry about, it’s a factor for wealthy people.

Other options for transferring a home include using revocable or irrevocable trusts and transferring homes by signing over a deed while retaining a life estate on the deed, which allows parents to remain in the home as long as they live.

The best way to transfer a family home to the next generation starts with consulting an estate planning attorney to review the options. Family dynamics, tax planning and Medicaid all need to be considered. Just as with all things concerning estate planning, the best plan is to put a plan into place long before it’s needed.

Reference: Newsday (May 2, 2024) “Wills, trusts, sales: How Long Island parents pass houses to kids”

Gift and Estate Tax Exemption Limits Increase for 2024

The year 2024 will bring more reasons to be generous, since the Internal Revenue Service (IRS) has increased the limits for gift and estate tax exemption amounts to their highest amounts ever. It’s good news to start the year with, reports the article “IRS Increases Gift and Estate Tax Exempt Limits—Here’s How Much You Can Give Without Paying” from yahoo! finance.

Those with large estates should always consider gifting during their lifetime to reduce taxes by using the annual gift and lifetime gift and estate tax exemptions. Right now, you may give an unlimited number of people up to $17,000 each in a single year without taxes. However, in 2024, this increases to $18,000 per person. For married couples starting in 2024, a gift of $36,000 can be made to any number of people, tax-free.

More good news: the IRS announced that the lifetime estate and gift tax exemption will increase to $13.61 million in 2024. A gift exceeding the annual limits won’t automatically prompt a gift tax. The difference is taken from the person’s lifetime exemption limit, and no taxes are owed. Your estate planning attorney will create a long-term strategy to use these exemptions to manage your estate tax liabilities.

Let’s say you were feeling generous and bought a friend a car for $20,000 in 2023. You would have exceeded the annual limit of $17,000 but wouldn’t owe any additional taxes. You’d use IRS Form 709 to report the gift and deduct $3,000 from your lifetime exemption of $12.92 million for this year. If you instead make the gift in 2024, you’d subtract $2,000 from your $13.61 million limit.

Gifts between American spouses are virtually unlimited. Couples have $24.84 million in estate tax exemptions, and going over this limit is only taxed upon the surviving spouse's death.

However, a gift to a non-U.S. citizen, regardless of whether or not they are a U.S. resident, falls under different rules and is subject to an annual tax exclusion amount. The annual amount one may give to a spouse who is not a U.S. citizen increases to $185,000 in 2024 from $175,000 in 2023.

Something else to keep in mind—unless Congress acts, the lifetime estate and gift tax exemption is due to return to the pre-2017 Tax Cuts and Jobs Act level of $5.49 million on December 31, 2025. Your wisest move is to speak with your estate planning attorney about a strategic plan for gift-giving and planning to minimize estate tax liability before the change occurs.

Reference: yahoo! finance (Nov. 14, 2023) “IRS Increases Gift and Estate Tax Exempt Limits—Here’s How Much You Can Give Without Paying”

Can You Remove Someone from a Life Estate?

Parents often use life estates to leave the family home to children, while remaining in the house for the rest of their lives. However, sometimes things don’t work out as intended. If and how changes may be made to a life estate is the focus of a recent article “How to Remove Someone from a Life Estate” from Yahoo! Finance. For the life estate to be flexible, certain provisions must be in the document when it is first created. An experienced estate planning attorney is needed to do this right.

A life estate allows two or more people to jointly own real estate property. One person, referred to as the “life tenant” has ownership of the property for as long as they live. The other person, called the “remainderman,” takes possession only after the life tenant’s death. Multiple people can be named as life tenant and remainderman. However, the more people involved, the more complicated this arrangement becomes.

The remainderman has an unusual position. They don’t have full possession of the property until the life tenant dies, yet they have an interest in the property. The life tenant is not allowed to do certain things, like take out a mortgage or sell the property, without the consent of the remainderman.

The remainderman must agree to any changes in any person or persons named as other remainderman. If there’s more than one, which happens when there’s more than one adult child, for instance, all of the remaindermen must agree, before any names on the life estate can be removed or changed.

If one of the remainderman becomes heavily indebted, has a contentious divorce, or is sued for a considerable sum, their share of the property could be lost to creditors, ex-spouses, or adversaries. In that case, removing the problematic remainderman could protect the value of the home.

Most life estates are irrevocable, and the laws concerning life estates vary by state.

One way to work around the need for remainderman approval, is to use a Testamentary Power of Appointment, a clause in a will permitting the life tenant to change the person to whom the property will be left upon death. Invoking the Power of Appointment doesn’t make the life estate invalid, so the tenant is still constrained from selling the property or taking any other actions without permission from the remaindermen.

The testamentary power of appointment does give the life tenant some negotiating muscle but must be built into the documents from the start.

Another trust used in this situation is the Nominee Realty Trust. This is a revocable trust holding legal title to real estate. A property owner files a new deed transferring ownership to the nominee realty trust. The trust specifies who receives the property after the owner’s death. The grantor of the nominee trust can direct the actions of the trustee, so the life tenant has the legal ability to tell the trustee to change the names of the remaindermen. This flexibility may be desirable when the children are problematic. This has to be set up when the life estate is first established.

There are occasions when the remainderman wants to terminate the interest of the life tenant. This is actually easier than removing or changing the remainderman but requires the life tenant to do something particularly egregious or illegal. The life tenant has certain rights: to rent out the property, to change or improve the property—as long as the property is being improved. The life tenant is responsible for paying taxes, maintaining the property and avoiding any liens being placed on the property.

If the life tenant does not fulfill their responsibilities or allows the property to lose value, it may be possible for the remainderman to have the life tenant’s interest terminated. However, that depends upon the provisions in the life estate. This option should be discussed and planned for when the life estate is created.

Reference: Yahoo! Finance (Dec. 16, 2021) “How to Remove Someone from a Life Estate”

Homeownership and Medicaid Can Be Problem

The challenges begin when homeowners don’t do any Medicaid planning and decide the best answer is simply to gift their home to their children. It doesn’t always work out well for the homeowners or their children, warns the article “Owning real estate without jeopardizing Medicaid paying for nursing home” from limaohio.com.

A key tax avoidance opportunity is usually missed, when real property is gifted outright. The IRS says that if someone owns real estate, when that person passes, the heirs may eliminate a large portion of the taxable gains, if the real estate ends up being sold by an heir for more than the original owner paid for the property.

Let’s walk through an example of how this works. Let’s say Terry buys a farm for $1,000. The cost to buy the farm is referred to as a “tax basis.”

If the family is planning for the possibility of nursing home costs, Terry might want to give that farm away to her children Ted and Zach. She needs to do it at least five years before she thinks she’ll need Medicaid to pay for long-term nursing care, because of a five-year lookback.

When Terry gifts the farm to Ted and Zach, the two children acquire Terry’s tax basis of $1,000. Ted gets $500 of the tax basic credit, and so does Zach.

The years go by and Ted wants to buy out Zach’s half of the farm. The farm is now worth $5,000. So, Ted pays Zach $2,500 for Zach’s half of the farm. Zach now has a tax basis of $500, which is not subject to tax. And Ted receives $2,000 more than his $500 tax basis, and Ted will need to pay capital gains on that $2,000 gain.

It could be handled smarter from a tax perspective. If Terry owns the farm when she dies, then Ted and Zach get the farm through her will, trust or whatever estate planning method is used. If the farm is worth $3,000 when Terry dies, then Ted and Zach will get a higher tax basis: $3,000 in total, or $1,500 each. By owning the farm when Terry dies, she gives them the opportunity to have their tax basis (and amount that won’t be taxed if they sell to each other or to anyone else) adjusted to the value of the property when Terry dies. In most cases, the value of real estate property is higher at the time of death than when it was purchased initially.

There’s another way to transfer ownership of the farm that works even better for everyone concerned. In this method, Terry continues to own the farm, helping Zach and Ted avoid taxes, and keeps the property out of her countable assets for Medicaid. The solution is for Terry to keep a specific type of life estate in the farm. This needs to be prepared by an experienced estate planning attorney, so that Terry won’t have to sell the farm if she eventually needs to apply for Medicaid for long term care.

Your estate planning attorney will be able to help you and your family navigate protecting your home and other assets, while benefiting from smart tax strategies.

Reference: limaohio.com (Nov. 7, 2020) “Owning real estate without jeopardizing Medicaid paying for nursing home”

What's the Difference Between a Life Estate and an Irrevocable Trust?

Investopedia’s recent article asks “Life Estate vs. Irrevocable Trust: What's the Difference?” The article explains that a life estate and an irrevocable trust are two different ways to make certain that assets are transferred to the right party. Each of these has advantages and disadvantages.

A life estate that’s used to gift property will divide the ownership between the giver and receiver. Some parents create a life estate to reduce their assets to qualify for Medicaid. While the parent still has some interest in the property, Medicaid doesn’t count it as an asset. A life estate lasts for the lifetime of its creator and it prohibits the selling of the asset, without the permission of its beneficiaries. Therefore, a parent can’t sell a home without the permission of his children, if they are beneficiaries of the life estate.

If you’re attempting to be eligible for Medicaid and are concerned that your home will disqualify you, ask your estate planning or Medicaid planning attorney about an irrevocable trust. With this trust, if a husband and wife both own a home, the husband can transfer his portion to his wife, and his Medicaid eligibility won’t include the home.

There must be a five-year gap between the creation of the trust and the application for Medicaid. If there isn’t, those funds will be counted as part of existing assets when determining Medicaid eligibility. Therefore, you can’t start an irrevocable trust right before you apply for Medicaid, if you want to receive those benefits.

One negative of an irrevocable trust is that the founder of the trust relinquishes any rights he has to the home. However, the beneficiary of the trust can’t sell the home, unless he or she is also named as a trustee. Once an irrevocable trust has been created, the trustee can’t take back control of the trust.

Remember that a life estate and an irrevocable trust aren’t always mutually exclusive. It’s possible to place an asset (like a home) in an irrevocable trust and keep a life estate. In that case, you’re irrevocably transferring ownership of your house to the trust. However, you still keep control. In this case, you are permitted to sell the home, remodel, or rent out a room, but the house itself—or the sales proceeds from it—would remain in the irrevocable trust.

In this situation, a parent would also not risk giving their children part of the tax liability that is associated with owning a home. The parent would keep more personal control over the house and wouldn’t need their child’s permission to sell the home. This may be the best option because it would still allow the parents to apply for Medicaid and not have the property count in their assets, but he or she would remain the sole decision-maker for the house.

Both have their pros and cons, but a combination of the two can often be the best answer. Make no moves either way, without the advice of an experienced elder law attorney.

Reference: Investopedia (June 16, 2019) “Life Estate vs. Irrevocable Trust: What's the Difference?”

How Does a Life Estate Work?

Life estates are used for a number of estate planning purposes. However, the most frequent strategy is to use a life estate where a parent transfers a home to a child and retains a life estate for themselves.

nj.com’s recent article, “How does a life estate work to transfer a home to a child?” explains that as a result of the transfer, the child becomes the owner of the home but the parent has certain rights and responsibilities.

The most critical right retained with a life estate, is the exclusive right to reside in the property. A child cannot force the parent to move out, and likewise, the child doesn’t have any right to live there. The child can live with their parent, but the deed doesn’t give the child the legal right to live there.

With a life estate, the parent must pay the property taxes and all the regular maintenance connected to the property. In addition, the life tenant is responsible for repairs—but not improvements.

This can be hard to determine, but typically the life tenant must maintain the property in the same condition, as when the life estate deed was signed. Therefore, if the parent moves out, and the property is rented, the parent has the right to receive all of the rents.

When the parent passes away, the life estate automatically ceases and the child now has all of the rights associated with the property.

As far as income tax, when the parent dies, the property receives a “step up” in basis to the date of death value. If the property is sold after the parent dies, the capital gain or loss is calculated by deducting the date of death value from the sales price. It’s a very important tax advantage, if the parent has owned the home for a long time and the property has a low basis.

Retaining the life estate can help the child avoid the capital gains tax more effectively than just transferring the property outright to the child.

However, in contrast, if the property is sold while the parent is still alive, part of the proceeds will be allocated to the parent and part will be allocated to the child.

Only the percentage that’s allocated to the parent will be excluded from income under the federal tax laws. The part that’s allocated to the child may be subject to capital gains taxation.

Every family’s situation is different, so it would be wise to speak with an estate planning attorney to explore whether or not a life estate would be the best situation for you and your family.

Reference: nj.com (July 12, 2019) “How does a life estate work to transfer a home to a child?”

What is a Life Estate?

The question of a life estate may arise, when adult children are discussing the possibility of moving a parent into an assisted-living facility and selling the family home.

The Spokesman-Review’s recent article asks: “Does a life estate have cash value?”

The article explains that a life estate is a form of co-ownership. A person’s interest in property is limited to his life, with the property passing to other recipients at his death. The person who holds the life estate is called a life tenant, and those who receive the property at the death of the life tenant are called remaindermen.

The life tenant and the remaindermen both have real interests in the property, but unlike other partnerships or other forms of co-ownership, the life tenant and remaindermen don’t have rights in the property at the same time. Only the life tenant has a current right to possession. The remaindermen’s interest doesn’t become activated, until the death of the life tenant.

A life estate is an actual form of ownership, rather than a right to use. The life tenant—in many cases the parent—“owns” the house until her death. The parent will need to pay the taxes and keep the property in reasonable condition. The life tenant could sell the property, but the buyer would only have rights until she dies. There would be few people who would ever buy the property. No lender would loan mom money against the property because their interest would go away when the life tenant died.

But there is a value to a life estate, and upon sale, the life tenant must be compensated for the sale of their interest. Life estates are valued using the age of the life tenant and the present fair market value of the property.

Although life estates typically end when the life tenant (or another specified person) dies, some specify conditions that can trigger termination. These would cause the life estate to be terminated, even though the life tenant is still alive and well. For example, a life estate may terminate, if the life tenant leaves the home for more than six months. The actual life estate document details any conditional limits that define when the life estate terminates.

A life estate can be a serious issue when planning for nursing home issues and trying to avoid MaineCare estate recovery upon the life tenant’s death.

Talk with an experienced estate planning attorney about whether a life estate makes sense for your situation, or if there are alternative strategies that would be better suited.

Reference: The Spokesman-Review (March 17, 2019) “Does a life estate have cash value?”