You should be aware of the different options that are available to you when you are planning your estate. When you are informed, you can utilize the optimal asset transfer method or methods, and you can avoid courses of action that are less than ideal.
The life estate is one of these options, and we will look at the pros and cons of this legal device in this post.
Eventual Transfer of Your Home
If you leave your home to an inheritor in a simple will, you would name an executor to act as the administrator after your passing. When the time comes, the will would be admitted to probate, and the court would supervise during the administration process.
The home and the other property that is being passed on through the terms of the will would not be transferred until the court closes the estate. This process will typically take close to a year in most jurisdictions, and in addition to the time consumption, expenses accumulate during probate.
A life estate can facilitate the transfer of your home outside of probate. To execute this strategy, you designate a “remainderman” to inherit the property after your passing, and you would be called the “life tenant.”
The remainderman would not have any responsibilities with regard to property-related expenses; they would still fall to you as the life tenant. You would live in the property as usual for the rest of your life, and the remainderman would not have direct access from a legal perspective.
After your death, the remainderman would inherit the property, and the probate court would not be involved. Probate avoidance is one of the reasons why people use life estates, and there is another one.
A significant percentage of elders will require nursing home care later their lives, and Medicare does not pay for custodial care. Medicaid will cover a stay in a nursing facility, but you are probably aware of the fact that it is a need-based program.
You cannot qualify if you have significant assets in your name, but a home is not considered to be a countable asset. That’s the good news, but the bad news is that Medicaid is compelled to seek reimbursement from your estate if you are enrolled in the program while you are living.
If you are in direct possession of your home at the time of your passing, Medicaid could place a lien on the property. However, if it is going to be transferred through a life estate, Medicaid would not be able to touch the home during the recovery phase.
Loss of Control
On the negative side of the ledger, there is a loss of control when you have a life estate. You would not be able to sell the home unless you get the remainderman to agree to the sale.
Even if you and the remainderman were on the same page with regard to a sale, you would not get half of the proceeds. You would be selling your interest in the property, which is the right to live in it for the rest of your life, and the value of this interest is limited.
There are other ways to transfer a home outside of probate. You could convey assets into a living trust, and probate would not be a factor when the assets are being distributed to the beneficiaries.
While you are living, you would act as the trustee, so you would have complete control of the assets every step of the way. If you want to sell the home or anything else that is held by the trust, you would have the power to do so.
This level of control is a positive on one hand, but on the other, the assets would count if you apply for Medicaid. To accomplish this objective, you could convey your property into an irrevocable, income-only Medicaid trust.
If your home is in the trust, you could live in it for the remainder of your life, and it would not count for Medicaid eligibility purposes. It would also be protected during the recovery stage, but you have to fund the trust at least five years before you apply for Medicaid.
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