Last time I mentioned that a life estate can be used to avoid probate. To explore how that works, we should first talk about what a life estate is.
Property ownership has many aspects. Title to a piece of property can be shared, like in the joint ownership we discussed briefly last time. It can be divided physically, with different people each taking a small physical portion of the asset. An example: $500 cash can be divided among four people by giving each person $125.
Property can also be divided temporally. No, this is not science fiction; title to a property has a time element as well as a physical element. A person who has full ownership (called ‘fee simple’) of a piece of property can divide that property into a present ownership interest, called a life estate, and a future ownership interest, called a remainder interest.
When a life estate is created, the property owner reserves the right to use and benefit from the property for as long as he is alive. He or she can lease out the property to a third party or use it for their own personal benefit.
The property owner also transfers all rights to the property after his death to a second individual. That individual has basically no control over the property while the original owner is alive, but automatically receives the property (in fee simple) when the original owner dies. The remaindermen take full ownership even if the life estate holder sold the property while he or she was alive. The ownership change happens automatically; no other action (such as probate) by the remainder holder is required.
This sounds like a really great way to do estate planning. Just give your heirs a remainder interest in all your property! Except that it’s not that simple. There are rules about “waste” and many types of property do not lend themselves to life estate creation. You wouldn’t want to give your kids a remainder interest in your savings account because the waste rules would restrict your ability to access and spend that money.
I mentioned last time that life estates used to be a common tool in estate planning because it made it very easy to transfer ownership – most often of land – to a person’s heirs while avoiding the expensive probate process. It also provided certain protections when applying for Medicaid: a life estate used to be non-countable for Medicaid purposes. The Deficit Reduction Act of 2005 changed all that. Medicaid now assigns a value to a life interest based on that person’s life expectancy on the Social Security tables.
The use of life estates can be effective when estate planning, especially in circumstances where trusts are involved. Many attorneys (at least where I live and practice) still use life estates as one of their primary tools in estate and long-term care planning. Ask about how a life estate will affect a Medicaid application.
Or, better yet, get a second opinion. Our first consultation is free. Call 712-737-3885 to set up an appointment.
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Lawyer Joke of the Day:
There's an interesting new novel about two ex-convicts. One of them studies to become a lawyer. The other decides to go straight.
