There are many different ways to proceed when you are planning your estate, and we endeavor to provide information about all the transfer methods that can be utilized. One of them is a life estate, and we will take a look at this approach here.
The Probate Process
In order to understand why people use life estates, you have to digest some information about estate administration and the probate process. If you arrange for property transfers through the terms of a will, you designate an executor to act as the administrator after your passing.
The executor would admit the will to probate, and the court would supervise during the administration phase. Creditors would be notified and final debts would be paid, so the executor would obtain an Employer Identification Number from the IRS and start an estate bank account.
The executor will inventory the assets and prepare them for distribution to the beneficiaries. Meanwhile, the court will examine the will to determine its validity, and will challenges can be presented during probate.
This process serves a purpose, but it will take close to a year to run its course in many instances, and complicated cases can take longer. Since no inheritances are distributed while the estate is being probated, this waiting game is not very pleasant if you are a beneficiary.
Anyone that is interested can obtain probate records to find out how the assets were distributed, so there is a loss of privacy. Expenses are another negative, and they can consume between three and seven percent of an estate according to a study that was conducted.
Medicaid Estate Recovery
A significant percentage of seniors enroll in the Medicaid program late in their lives because it will pay for long-term care, and Medicare does not cover custodial care. You can qualify for Medicaid as a homeowner, but there is a Medicaid estate recovery mandate.
They will put a lien on property that is part of your estate if its transfer would be subject to the probate process. If you are in possession of your home at the time of your death, and you are leaving it to a beneficiary in a will (or if you die intestate), Medicaid could place a lien on the home.
Now that we have shared the necessary background information, we can get to the point of this post. You could create a life estate as a homeowner to avoid probate, and in the process, you would protect the property from Medicaid estate recovery.
When you implement this strategy, you name someone that is essentially a co-owner of the property as soon as you create the life estate. For the purposes of this example, we will say that it is your son.
You would retain the right to live in the home for the rest of your life rent-free, so nothing would change in any material sense. After your death, your son would become the owner of the home, and the transfer would not be subject to probate.
Since Medicaid estate recovery is limited to probate property, the home would be protected, and your son would not have to go through the hassles that go along with the probate process.
Life Estate Drawbacks
A life estate can sound like a good solution on the surface, but there are some potential negatives. You would not be able to sell, rent out, or mortgage the home without the approval of your son, who would be the “remainderman” in legal parlance.
Even if your son approves of the sale of the home, you would have to split the proceeds based on actuary tables that are kept by the Internal Revenue Service.
Schedule a Consultation Today!
We can help you implement a strategy that will protect your home without taking any risks. If you are ready to get started, you can schedule a consultation at our Memphis, TN estate planning office if you call us at 901-763-2500 or 866-997-6325.
There is also a contact form on this site you can use to send us a message, and if you reach out in this manner, you will receive a prompt response.
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