When you are planning your estate, there are a number of different methods that you can utilize to facilitate asset transfers after you are gone. One possibility is the life estate, and we will explain the positives and the negatives in this post.
Real Property Transfers
You can potentially use a life estate to arrange for the transfer of your home or some other type of real property. If you were to use this approach to leave your place of residence to someone, you would be the “life tenant,” and the inheritor would be called the “remainderman.”
The remainderman would not have legal access to the property while you are living. You would continue to live in your home as usual, and you would have all the same responsibilities. If there is a mortgage, you would pay it, and you would be responsible for taxes, insurance, upkeep, etc.
After your death, the remainderman would inherit the property, and the transfer would not be subject to probate. This is a legal process that would enter the picture if you use a will to transfer the home.
Probate serves a purpose, because the court examines the will to determine its validity, and creditors are given a chance to come forward seeking satisfaction. This being stated, the process will not be welcomed by the rightful heirs to an estate.
It will take about eight months for probate to run its course if there are no particular complications, and no inheritances are distributed during this interim. Probate is a public proceeding so there is a loss of privacy, and probate costs reduce the value of the estate.
Medicaid Planning
Life estates are also used by people who want to qualify for Medicaid to pay for long-term care. Many elders are in this position, because most seniors will need living assistance eventually, and Medicare does not cover custodial care.
You cannot qualify if you have significant assets in your name, but your home is not a countable asset. However, the program is required to seek reimbursement from your estate after you pass away if you use Medicaid to pay for long-term care.
If your home is held in a life estate, your remainderman would inherit the property after your passing, and Medicaid would not be able to put a lien on the home.
The Downside of a Life Estate
All of the above can sound appealing, but there is a major drawback to consider. Let’s say that you decide that you want to sell the property for some reason. You may get married late in your life, or you may decide that you want to spend your last years living on the beach in Hawaii.
When you have a life estate, you would not be able to make this decision unilaterally and pocket the proceeds. You would need the permission of the remainderman, and this would also apply to a decision to mortgage the home.
Even if you got the approval of the remainderman to sell the property, you would not be in a very good position. Your only interest in the property would be the right to live in it for the rest of your life, so the remainderman’s interest would be more valuable.
Other Possibilities
When it comes to probate avoidance without losing complete control of your property, you could establish and fund a revocable living trust. If you were to convey your home into this type of trust, you would live in it as usual, and you would be able to sell it or mortgage it at any time.
After your passing, the home and any other property that you have in the trust would be transferred to the beneficiaries that you name outside of probate.
However, the assets would be countable if you apply for Medicaid. If Medicaid eligibility is your objective, you could convey assets into an irrevocable trust.
Your ability to live in a home that you sign over to the trust would not be disrupted, and its eventual transfer to a beneficiary that you designate would not go through probate.
The home and other assets in the trust would not be counted by Medicaid with one caveat. You have to fund the trust at least five years before you apply for Medicaid coverage.
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We are here to help if you are ready to work with an attorney to put a plan in place. You can send us a message to request a consultation appointment at our Glastonbury or Westport, CT estate planning offices, and we can be reached by phone at 860-548-1000.
Mr. Karpe is licensed to practice law before the courts of the States of Connecticut and Colorado, the U.S. District Court for Connecticut, the U.S.District Court for Colorado, the United States Supreme Court, and the U.S. Tax Court. He is a member of the Connecticut and Hartford County Bar Associations as well as the Estate and Probate Section of the Connecticut Bar Association. In addition, he is a member of the American Academy of Estate Planning Attorneys, the National Academy of Elder Law Attorneys and Planned Lifetime Assistance Network of Connecticut.