There are many tools in the estate planning toolkit, and as a layperson, you may hear bits and pieces about some of them. Incomplete information can lead to mistakes that yield negative consequences later on, so knowledge is power in this regard.
With this in mind, we will look at the estate planning device called the life estate in this post.
Real Property Transfers
You can potentially use a life estate to facilitate the future transfer of your place of residence or any other type of real property.
The legal term for a person that is establishing a life estate is the “life tenant,” and the individual that will eventually inherit the property is called the “remainderman.”
If you use a life estate to arrange for the transfer of your home, you would continue to live in the home for the rest of your life. You would be responsible for mortgage payments if they are still a factor, and you would pay taxes, insurance, and other property-related expenses.
While you are alive, the remainderman would not have the legal right to use the property, but they would have a lot of power. As the life tenant, you would not have the freedom to mortgage or sell the property without the full cooperation of the remainderman.
When you establish the life estate, you surrender full ownership. You are entitled to live in it for the rest of your life, and the value of this interest is limited.
As a result, if you establish a life estate late in your life, your interest would not be equal to half of the fair market value of the home.
One of the reasons why people create life estates is to facilitate the transfer of real property outside of probate. This is a costly and time-consuming legal process that takes place under the supervision of the Surrogate’s Court.
If you were to arrange for the transfer through the terms of a will, it would be subject to probate.
A life estate can also be used for Medicaid planning purposes. Many seniors seek Medicaid eligibility at some point, because Medicare will not pay for a stay in a nursing home.
Since it is a need-based program, you cannot qualify if you have more than $15,900 in countable assets in your name. The qualifier “countable” is quite operative, because in some instances your home is not considered to be a countable asset.
However, there is another consideration. If you qualify for Medicaid as a homeowner, Medicaid can place a lien on your home after your death, because they would be required to seek reimbursement from your estate.
If you set up a life estate at least five years before you apply for Medicaid, the remainderman would inherit the home immediately after your passing. It would be protected during the Medicaid recovery phase, because the property would no longer be titled in your name.
Life Estate Alternatives
You can facilitate the transfer of your home outside of probate without surrendering complete control if you convey the property into a revocable living trust. In addition to the home, you can add other property that will comprise your estate.
While you are alive and well, you would act as the trustee, so you could live in the home and utilize any of the other resources as you see fit. After your passing, the successor trustee that you name would distribute the assets to the beneficiaries outside of probate.
The revocable living trust is an effective probate avoidance tool, but it is not appropriate for Medicaid planning, because the assets in this type of trust would count. You could alternately use a special Medicaid trust for nursing home asset protection purposes. Depending on your circumstances, you may be able to maintain full control of the trust assets as well as maintain beneficial enjoyment of those assets. These trusts are subject to complex rules, so you will want to work with an experienced elder law attorney.
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