There are different ways to arrange for the transfer of property ownership when you are planning your estate. You should be aware of your options, and you should weigh the potential negatives that go along with some courses of action that sound promising on the surface.
With this in mind, we will look at the device called a life estate in this post.
Estate Administration and Probate
Some background information is important to understand why people use life estates, and probate is at the center of the equation. This is a legal process that would be necessary if you transfer assets through a will; the probate court also presides over intestate estate cases (where there is no will).
During probate, the executor or personal representative will notify creditors about the death of the testator, and they are given time to seek payment. The executor will start an estate bank account so they can pay the debts, and the assets will be identified and inventoried.
The property will be prepared for distribution, and this will involve appraisals and liquidation in many instances. All this will take a number of months, and the beneficiaries’ inheritances are delayed while the estate is being probated by the court.
Probate expenses are another drawback, and anyone who takes the appropriate steps can obtain probate records so privacy is lost. When the court closes the estate, the inheritors will receive their bequests in accordance with the wishes of the decedent.
Medicaid Estate Recovery
There is another piece to this puzzle that you have to be aware of to grasp the purpose of a life estate.
Many people assume that Medicaid is irrelevant if you are going to qualify for Medicare when you are a senior citizen. This is understandable, but there is a very good reason why many elders seek Medicaid eligibility.
More than one third of seniors will require nursing home care, and the costs are exorbitant. Medicare does not pay for the custodial care that nursing facilities provide, but Medicaid will cover the expenses.
You cannot qualify if you have significant assets in your name, but your home is not a countable asset. That’s the good news, but the bad news is the Medicaid estate recovery mandate.
If you are a Medicaid beneficiary and you pass away while you are still in direct possession of your home, the program would put a lien on the property under most circumstances.
Life Estate Benefit
A life estate is used to facilitate the transfer of a home outside of probate. To implement this approach, you would name a remainderman who would inherit your home after your passing.
You would have the right to possess the home for the rest of your life so you would not be uprooted, and you would not be required to share access during your lifetime with the remainderman. They would inherit the property after your death, and the probate court would not be involved.
With regard to Medicaid estate recovery, the program can attach assets that would be transferred through probate. As a result, the property would be protected during the estate recovery phase (although some states have been known to claim that the life estate had value at death that should be recoverable by Medicaid estate recovery).
Drawbacks of Life Estates
One problem with a life estate is the fact that you are surrendering an ownership interest as soon as you create it. From that point forward, you cannot sell or lease the property or make substantial changes to the property without the approval of the remainderman, and they would be entitled to a portion of the proceeds upon the sale of the property.
IRS actuary tables would be used to determine the percentages that you and the remainderman would be entitled to receive.
Creating a life estate and naming someone as remainderman is also treated as a gift by Medicaid and will usually result in a penalty if you apply for Medicaid within five years of the transfer.
There are safer ways to protect your property from estate recovery and facilitate transfers outside of probate if these are your objectives.
Schedule a Consultation!
As you can see, there is a lot to think about when you are planning your estate. When you work with an attorney from our firm, we will make sure that you understand your options, and we will make recommendations based on the circumstances.
If you are ready to get started, you can schedule a consultation at our Ashland, KY estate planning office if you call us at 606-324-5516; our office in Florence, KY can be reached at 859-372-6655. The number in Charlotte, NC or Huntersville, NC is 704-944-3245, and you can use our contact form to send us a message.