When planning your estate, you should explore all your options, and a life estate is one of them. This approach has its benefits,. It also has its limitations and drawbacks. Understanding them can guide you in making an informed decision so you don’t settle for an imperfect solution.
This blog will delve into the pros and cons of life estates and explore alternative estate planning tools.
What Is a Life Estate?
A life estate is a type of property ownership. It grants an individual (the life tenant) the right to live in or use a property during their lifetime. Upon the life tenant’s death, ownership passes to another person (the remainderman), who was named when the life estate was established.
Example of a Life Estate
Imagine Sarah owns a house. She decides to create a life estate, naming herself as the life tenant and her son, John, as the remainderman. Sarah lives in the house for the rest of her life. Upon her passing, John automatically becomes the full owner of the house.
Uses of a Life Estate
- Avoiding Probate: Since the property automatically passes to the remainderman upon death, it doesn’t go through probate.
- Estate Planning: It allows the life tenant to ensure the property goes to a specific person after their death.
- Protection From Medicaid Estate Recovery: Many seniors seek Medicaid eligibility to cover long-term care costs, and a life estate can protect a home from Medicaid estate recovery.
In spite of these uses, life estates have limitations. The life tenant is responsible for property taxes, maintenance, and insurance. Also, they cannot sell or mortgage the property without the remainderman’s consent.
Alternatives to Life Estates
While life estates can be useful, there are better options available, such as a living trust or a Medicaid trust.
Living Trusts
A living trust is a legal entity created to hold ownership of an individual’s assets.
Benefits:
- Avoiding Probate: Similar to a life estate, a living trust avoids probate, allowing for a smoother transfer of assets.
- Control and Flexibility: The grantor (person who creates the trust) can be the trustee, maintaining control over the assets. The terms can be changed or revoked during the grantor’s lifetime.
- Privacy: Trusts are not public record, unlike wills, offering more privacy.
Example:
Mary transfers her house into a living trust, naming herself as trustee and her daughter as the successor trustee. Mary manages the property as she wishes during her lifetime. Upon her death, the house is transferred to her daughter without going through probate.
Medicaid Trusts
A Medicaid trust is designed to protect assets while allowing an individual to qualify for Medicaid, which can cover long-term care costs as we have stated.
Benefits:
- Protecting Assets: Assets in a Medicaid trust are not counted towards Medicaid’s asset limits.
- Eligibility for Medicaid: The trust helps in meeting Medicaid’s strict asset and income guidelines.
- Property Protection: A home that is held by a Medicaid trust would be protected during the estate recovery process.
Considerations:
- Irrevocability: Once established, these trusts cannot be altered or revoked.
- Look-Back Period: Medicaid has a look-back period, so the trust must be set up at least five years before you apply for Medicaid.
Example:
John sets up a Medicaid trust, transferring his home into it. He retains the income generated by other assets in the trust but does not have access to the principal. This arrangement helps him qualify for Medicaid for long-term care while preserving the home for his heirs.
Summing It Up
Life estates, living trusts, and Medicaid trusts each serve distinct purposes in estate planning. While a life estate can be a simple way to transfer property and avoid probate, it lacks the flexibility and control offered by a living trust.
Alternately, a Medicaid trust can be a strategic tool for asset protection and Medicaid eligibility, especially when planning for long-term care needs.
Let’s Get Started
We are here to help if you would like to work with an Oklahoma City estate planning lawyer to put a plan in place. You can send us a message to request a consultation appointment, and we can be reached by phone at 405-843-6100.
Our firm also has an office in Tulsa, and if that one is more convenient, the number there is 918-615-2700.
Since founding Parman & Easterday in 1985, Larry has led over 1,000 free, community-service education programs and helped more than 10,000 Oklahoma families go from putting off their estate plan to getting it done. His goal for every client is the same: to become the person their family calls "the one who took care of everything."
Larry is the author of three books: The Straight Shooter's Guide to Estate Planning; Estate Planning Basics; and Guiding Those Left Behind in Oklahoma. He served as Oklahoma's Secretary of State and Secretary of Commerce, and his firm is the only member of the American Academy of Estate Planning Attorneys in the state.
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