An old estate planning tool is being rediscovered and deployed by estate planning and elder law attorneys. In fact, more folks seem to be using this tool to protect their family homes future creditors, maybe even Medicaid estate recovery, as well as for estate planning purposes.
What is it?
The "life estate".
A recent Motley Fool article, titled “What a Life Estate Is And How It Could Save Your Home,” takes up the nuts-and-bolts of life estates.
Here is how it works.
A life estate deed gives an individual the right to a home or other real property throughout that person's life.
The life estate holder can live in the home or rent it out (and keep the proceeds), while paying the ordinary costs of maintaining the home. Think property taxes and insurance.
Upon the death of the life estate holder, the property passes automatically to the holder of the remainder interest.
According to the Motley Fool, some are using a life estate to safeguard the family home from creditors, especially Medicaid.
How does that work?
The rules of Medicaid do not require you to sell the family home, but Medicaid does puts a lien on the home.
After the original owner dies, Medicaid is entitled to collect against that lien, forcing the sale of the home if necessary in order to collect that money.
But, if you create the life estate at least five years before applying for Medicaid and depending on whether the definition of "estate" under the laws of your state includes "non-probate transfers (e.g., life estates), then Medicaid's anti-transfer rules AND/OR estate recovery rules may not apply.
This is rather tricky stuff and paint with a broad brush at your own risk!
Make no moves without consulting an experienced elder law attorney.
Disclaimer: I am not an elder law attorney, nor do I play one on TV.
I am a big believer in long-term care insurance, just like homeowner's insurance, automobile insurance, disability income insurance and life insurance. [And I have taken my own advice and am covered with each of these.]
Life estates do present other challenges.
For example, the creation of the life estate itself is treated as a present "gift" in part to the remainder interest holder, which may mean gift tax liability.
Also, the life estate holder cannot sell the property without the permission of the holders of the remainder interest. Then, if sold, the proceeds of a sale have to be divided according to the relative value of the life estate and remainder interests.
A life estate may not make sense for everyone, but it can be a useful tool in the right situations for those who understand all of the factors involved.
For purposes beyond "Medicaid planning," talk to an experienced estate planning attorney regarding life estates for estate planning purposes.
Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.
For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri) and to download free tools to help you organize your estate, visit my estate planning website.
Reference: Motley Fool (June 8, 2015) “What a Life Estate Is And How It Could Save Your Home”