A life estate can potentially be used to facilitate the transfer of your home and other real property. There are some benefits, but there is also a major drawback, and we will provide the details in this post.
If you establish a life estate, you would be called the “life tenant,” and the person that will inherit the home after your death would be referred to as the “remainderman.” You would continue to live in the home as usual for the rest of your life.
All of the costs associated with the home would fall to you, and the remainderman would have no responsibilities on that level. During this interim, the remainderman would have no legal right to access or use the property.
After your death, the remainderman would inherit the property, and this transfer would not be subject to probate. This is a legal procedure that will enter the picture if you were to transfer the home through the terms of a simple will.
Probate serves a purpose, because final debts are paid, and the court examines the will to determine its validity. However, it is time consuming, it is a public proceeding so there is a loss of privacy, and probate expenses reduce the value of the estate.
The majority of senior citizens will need some type of living assistance, and over 30 percent of elders will require nursing home care. These facilities are very expensive, and Medicare does not pay for the custodial care that they provide.
Medicaid will cover long-term care, and in fact, most people that are in nursing homes are enrolled in the program. You cannot qualify if you have significant assets in your own name, but your home is not a countable asset.
On the surface, it can seem as though you could simply qualify as a homeowner if you need long-term care without any problem. In fact, there is a process called Medicaid estate recovery. The program could place a lien on your home after you pass away.
You can give gifts to develop a financial profile that will lead to Medicaid eligibility. However, there is a five-year Medicaid look-back period that applies to divestitures that are made prior to the application date.
If you establish a life estate at least five years before you apply for Medicaid, the property would be transferred to the remainderman after your death, and it would be protected during the estate recovery phase.
Selling the Home
There is one major factor to weigh heavily when you are considering the utilization of a life estate. Let’s say that you get remarried after you establish the life estate and the trajectory of your life changes.
You and your spouse decide that you want to sell the property. This would not be possible without the cooperation of the remainderman. Plus, you would be selling your interest in the home, which is not a full ownership share.
After you create a life estate, your interest in the property is the right to live in it for the rest of your life. This has limited value, and it would be taken into account if the property is sold. The same arrangement would apply if you wanted to mortgage the home.
If you want to retain complete control of your property throughout your life and arrange for an eventual probate-free transfer, you could establish a living trust. This would be a revocable trust, and you would be able to act as the trustee while you are living.
After your passing, the successor trustee would distribute the assets to the beneficiaries in accordance with your wishes, and the probate court would not be involved.
This would not be an effective Medicaid planning solution, because the property in the trust would be countable for Medicaid eligibility purposes. As an alternative, you could establish and fund an irrevocable Medicaid trust.
You could accept distributions of the trust’s earnings, and you could live in the home as usual. As long as you honor the five-year look back period, the home would not count if you applied for Medicaid, and it would be out of reach when Medicaid is seeking recovery from your estate.
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Today is the day for action if you are going through life without an estate plan. You can schedule a consultation at our Bluffton, SC estate planning office if you call us at 843-815-8580, and you can use our contact form to send us a message.