Life Estate Can Be a Powerful Planning Tool When Done Correctly

Life Estate Can Be a Powerful Planning Tool When Done Correctly

A majority of individuals’ most important asset is their home, and protecting it is always a priority. In your retirement, though, the threat of huge, unexpected medical bills is a possibility, and expenses like long-term care –which Medicare and other regular health insurance plans typically don't cover – can quickly wipe out your assets. To protect your home, some advisors recommend using what's known as a life estate.

What is a Life Estate?

Dan Caplingers 2015 article, titled "What a Life Estate Is And How It Could Save Your Home," provides excellent information regarding life estates.

A life estate gives an individual the right to a home or other real property throughout that person's life. The life estate holder can live in the home or rent it out and keep the proceeds. The life estate holder has to pay the ordinary costs of maintaining the home, such as paying property taxes.

When the life estate holder dies, the property then goes to the holder of the remainder interest, who automatically receives the full legal title and possession of the property without needing to go through probate.

Creating a Life Estate

Caplinger’s article explains that to create a life estate, the owner of the property can execute a deed that retains a life estate interest but gives the remainder interest to another person or group.

Many use a life estate to safeguard the family home from creditors, especially Medicaid. The rules of Medicaid don’t require you to sell the family home, but Medicaid puts a lien on the home.

After the original owner dies, Medicaid is entitled to collect against that lien, forcing the sale of the home if necessary in order to collect that money. But if you create the life estate at least five years beforehand, Medicaid's anti-transfer rules typically don’t apply.

The Challenges of Life Estates

Life estates do present some challenges, such as in the case that the creation of the life estate is treated as a gift to the remainder interest holder, which could mean gift tax liability may come into play.

Also, the life estate holder can't sell the property without the permission of the holders of the remainder interest. The proceeds of a sale have to be divided according to the relative value of the life estate and remainder interests. 

But the solution to the complications of life estates can be resolved with our Home Sweet Home® Trust – allowing you to stay home as long as you’d like, keeping your property taxes the same, and preserving equity for the remaining spouse or the kids.

Understanding and dealing with the complexities of a Life Estate is just one component of successful estate planning. To ensure a successful plan, we at Idaho Estate Planning will:

  1. Educate you and your helpers
  2. Take the time to get to know you, your family, your desires, your concerns, your goals, and your potential problems
  3. Gladly and patiently answer questions until you understand the concept or issue
  4. Based on experience with the problems and results caused by poor planning, help you design and implement the plan that fits your particular concerns and goals.

Remember, good planning is no accident. If you have any questions regarding estate planning, don’t hesitate to contact our office staff.

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