There are different ways to facilitate asset transfers after you are gone, and you should understand the options for two related reasons. On one side of the coin, you make informed choices when you understand the facts, and on the other side, you avoid mistakes.
With this in mind, we will look at the pros and cons of life estates in this post.
Transfer of Real Property
You can potentially use a life estate to arrange for the transfer of your home and other types of real property.
If you take this step to facilitate the future transfer of your home, you would be called the “life tenant.” The individual that will be inheriting the property is called the “remainderman.”
After you execute the paperwork, your living arrangement would not change at all. You would continue to live in the home for the rest of your life, and you would be responsible for the mortgage if there is one, taxes, insurance, etc.
The remainderman would have no input, and they would have no responsibilities. However, they would have a great deal of control. If you want to sell the property or take out a mortgage, your hands would be tied unless you can get the cooperation of the remainderman.
There is another drawback in this regard. Let’s say that you want to sell the property when you are 80 years old, and the remainderman agrees to go along with it.
We will assume that the house sells at full fair market value. You and the remainderman would not split the proceeds equally, because you would only be selling your interest in the home. This amounts to the right to live in the home until you pass away.
At the age of 80, your life expectancy would not be very long, so your portion would be quite limited.
Benefits of Life Estates
On the positive side, some people use life estates because they want to avoid probate. If you simply leave the home to someone in a will, the document would be admitted to probate. This is a public proceeding that is costly and time-consuming. The transfer through a life estate would not be subject to probate.
Many elders seek Medicaid eligibility late in their lives, because this program will pay for a stay in a nursing home. Medicare does not cover the custodial care that these facilities provide, and they are very expensive.
Your home is not a countable asset for Medicaid purposes, but there is the matter of Medicaid estate recovery. The program is required to seek reimbursement from your estate after you pass away if you are enrolled during your life.
To protect the home, you could create a life estate at least five years before you apply for Medicaid. The remainderman would inherit the property right after your passing, and it would be protected during the recovery phase.
Living Trust and Irrevocable Medicaid Trust
The two objectives that can be satisfied through utilization of a life estate are probate avoidance and Medicaid eligibility. If you are concerned about the former, you could consider the utilization of a revocable living trust to transfer your home and other property that will comprise your estate.
You would act as the trustee while you are living, and you would have absolute control of the assets in the trust in every way. After your passing, the property would be transferred to beneficiaries that you name in the trust declaration outside of probate.
This is one of the benefits that living trusts provide, but there are a number of others that we will cover in different post.
If Medicaid eligibility is the goal, you would not want to use a living trust, because the assets would count if you apply for coverage. However, you could establish and fund an irrevocable income-only Medicaid trust.
As name would indicate, you would be able to receive income that is generated by assets in the trust, but you would not have access to the principal. You could live in your home even though it is technically own by the trust.
The assets would not count if you apply for Medicaid, and they would be protected when Medicaid initiates the recovery process.
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