Life estates without powers are a tool for Medicaid planning, probate avoidance and tax efficiency, but there are potential problems to look out for. Knowing the implications and risks of a life estate is essential in determining whether it is appropriate for your situation.
What is a Life Estate?
In a life estate, two or more people each have an ownership interest in real property, but for different periods of time. The person holding the life estate — the life tenant — possesses the property during his or her lifetime. The other owner — the remainderman — has a current ownership interest, but cannot take possession until the death of the life estate holder. The life tenant has full control of the property during his or her lifetime and has the legal responsibility to maintain the property as well as the right to use it, lease it, and make improvements to it.
Life estates are viable planning techniques in many circumstances. They permit parents to pass ownership in their homes to their children while retaining absolute possession of the property during their lives. Under current law, by executing a life estate deed, the property avoids probate at the parents’ deaths, is protected from a Medicaid lien after five years, and receives a step-up in tax basis.
Are There Risks With Life Estates?
While life estates can be beneficial depending on circumstances and your role as either a life tenant or remainderman, there are potential issues that may arise with life estates and it’s important to fully understand the following risks:
- As a life tenant, you may not easily sell or mortgage property with a life estate interest without powers. The remaindermen must all agree if you decide to sell or borrow against the property.
- If the property is sold, the remaindermen are entitled to a share of the proceeds equal to what their interest is determined to be at that time.
- Once a remainderman is named on the deed to your house, he or she has an interest in the home and his or her legal problems could become yours. For example, if your child, who is a remainderman, is sued or owes taxes, a lien could be filed against your home. Your child’s interest in the home is not protected if he or she files for bankruptcy. If your child gets a divorce, his or her spouse could claim part of your child’s interest in your home. Should your child die before you do, the child’s estate would have to go through probate unless at least one other remainderman was listed as a joint tenant. However, while these claims may be made against the property, no one deprive you of your life estate interest during your lifetime.
What Are My Options?
As with most planning tools, a life estate in real property can be very useful with valuable benefits, but it is not for everyone. In many cases, the potential problems outweigh the benefits. As the law in this area is complex, it’s important to talk to a lawyer who knows about area of the law in-depth. Instead of a life estate, a more thorough option is an Irrevocable Trust. This type of trust protects the real estate and avoids probate, but only has one person in charge rather than all the life tenants and remaindermen. It also completely protects the property from any remaindermen’s legal or financial troubles. Either option offers some restrictions, but a trust is a little bit of extra complexity for a lot more certainty.
The best way to approach estate planning is to address all of your questions and concerns with your attorney, and then create the best plan based on current circumstances. Your attorney can walk you through all the options.
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