There are many different tools in the estate planning toolkit. You should be aware of your options for two reasons. The obvious one is the fact that you want to make the right choices. It is just as important to steer clear of the wrong ones. With this in mind, let’s take a look at the pros and cons of a life estate.
The Probate Process
Some of these possibilities may be appealing on the surface. However, there are some potential problems lurking underneath. A life estate would definitely fit into this category.
People who start to look into the subject of estate planning invariably find out about the legal process of probate. This is a procedure that takes place under the supervision of a court. It comes into play when assets will be transferred through the terms of a will.
This process is time-consuming, and no inheritances are distributed until the estate has been probated and closed by the court. It is a public proceeding, so anyone can access the records to find out how the assets were transferred.
Another drawback is the expense factor. There is a filing fee, and the executor receives remuneration. A probate lawyer and an accountant will be engaged in many instances, and there can be appraisals and liquidation fees along with incidental expenses.
Life Estates
Because of these negatives, probate avoidance strategies are implemented. This is one of the reasons why people use life estates.
You can use a life estate to transfer your home or some other type of real property outside of probate. If you utilize this approach, you would continue to live in the home for the rest of your life. You would also be responsible for the costs associated with the property.
A remainderman that you name in the paperwork would inherit the home after your passing. During your lifetime, they would have no legal access to the property. This transfer would not be subject to probate.
That’s the good news. The bad news is that you would not be able to sell or mortgage the property without the full cooperation of the remainderman.
Plus, your ownership interest would be limited to the right to live in the home for the rest of your life. If the remainderman was to go along with the sale, you would only be selling that limited interest, and the remainderman would have a more significant interest in the property.
Medicaid Planning
A life estate could also be part of a nursing home asset protection strategy. Most seniors will need living assistance. Many will require a level of care that only a nursing home can provide.
These facilities are costly, and Medicare does not pay for long-term care. Medicaid will cover these costs if you can gain eligibility. However, many of you are probably unaware of the fact that it is a need-based program.
Your home is not a countable asset for Medicaid eligibility purposes. However, Medicaid could put a lien on the home after your death if it is in your direct personal possession. If you establish a life estate, it would be protected, because the remainderman would own it after your death.
You have to act in light of the five-year look-back period. The life estate must be established at least five years before you apply for Medicaid coverage.
Other Options
It is possible to use a revocable living trust to arrange for the transfer of your home and other property that will comprise your estate. You would act as the trustee while you are living, so you would not lose control of the assets.
This control would include your ability to sell or mortgage the property without anyone else’s permission. You would be the sole owner. After your passing, the property would be transferred to the beneficiaries outside of probate.
This type of trust would not be used for Medicaid planning purposes, because the assets would be countable. However, you could utilize an irrevocable, income-only Medicaid trust.
If you convey your home into the trust, you can live in it as usual, and you can move other property into the trust. As the name would indicate, you could receive distributions of the trust’s income, but you would not be able to access the principal.
As long as you fund the trust at least five years before you apply for Medicaid, the assets would not count, and they would be protected during the Medicaid estate recovery phase.
Schedule a Consultation Today!
If you are ready to work with an Oklahoma City estate planning attorney to put a plan in place, we are here to help. 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 you are in that area, 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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