The Life Estate: A Specialized Tool

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.

Three Questions About Probate: Finale

“All happy families resemble one another, but each unhappy family is unhappy in its own way”

- Ambrose Bierce

How much will probate cost?

Inevitably, this is the question everyone wants to know the answer to. Sometimes this is even the first question I get asked when someone sits down across my desk. It’s a tough question to answer and it can be a tough answer to hear.

The cost of probate is often determined based on the total value of the estate. Some lawyers will use the value of the inventory as the base number. Others will use the amount reported on the estate tax return. In Iowa, state statute limits attorneys to charging no more than 2% of the total value of the estate.

Some of my avid readers may have a bit of sticker shock thinking about 2% of the total probate estate. On a $1,000,000 estate, the fee would be $20,000. There are a number of reasons for setting a fee in this manner. At the outset, it is often difficult to determine just how much work will be involved in completing the probate process. Sometimes, when large families are involved, the amount of communications required to keep the heirs apprised of the process can be a substantial cost to the attorney. Other times, the attorney gets involved with settling claims made by third-parties like charities or in interpreting what the deceased meant by the terms in his will.

Because of these unknowns, attorneys are forced to estimate their costs, determine the amount of profit they need to stay afloat and try to stay competitive all at once. However, regardless of your attorney’s method of choice, always remember that the fee charged should be negotiated between you and your attorney at the time you choose to hire him. You may be able to negotiate for administrative costs (i.e. cost of publishing notice, postage, etc.) or even court costs, if the process is simple enough.

I hope you've enjoyed our little discussion of some of the basics of probate. If you'd like to learn more, please do not hesitate to contact our office by phone or e-mail.

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Lawyer Joke of the Day:

Q: What is the one word that can make a lawyer smile?

A: Fees!

Three Questions About Probate: Part Two

“He neither drank, smoked, nor rode a bicycle. Living frugally, saving his money, he died early, surrounded by greedy relatives. It was a great lesson to me.”

- John Barrymore

Today we continue our discussion of the three main questions I get from heirs and executors. Question two:

What happens during probate?

I like the way the ABA talks about probate in its book Guide to Wills and Estates, Third Edition. They describe probate as having six main phases. Each of these phases is necessary before the terms of a will are fully carried out. Here is my take on those six phases:

1. Open the Estate: Typically, when an individual dies, that person’s family tracks down a copy of his or her will and seeks the help of an attorney in deciding what the next step should be. If they hire that attorney, he or she will work with the executor to give the will its full effect. This involves filing a probate petition with the district court and giving notice to the creditors of the deceased.
2. Collecting the Estate’s Assets: Once the probate case has been opened, the family begins compiling a list of the deceased person’s assets. The myriad assets and their values are listed in the probate inventory and submitted to the court.
3. Management of Assets: Sometimes a probate occurs at a time when the deceased was scheduled to receive income. Other times, the probate process takes a long time to complete. In these situations, the executor must manage the estate’s assets. If income is received, it should be accounted for and saved or possibly invested.
4. Handling Taxes: An estate is subject to several different types of taxes. The ones most people think of are the “death taxes.” This includes federal estate taxes and state inheritance taxes. Under the new law that was passed in December 2010, the current estate tax is capped at 35% and only applies to individual estates worth over $5 million. Inheritance taxes vary from state to state and often change year to year. These taxes are imposed based on the heirs’ relationship to the deceased. An estate is also subject to income taxes if that estate should receive income before it is closed. In that instance, the executor will need to file an income tax return for the estate to report its income and potentially pay the resulting taxes.
5. Closing the Estate: Finally, after all the necessary notices have been given, the estate can be closed. Completing this phase typically requires filing lots of forms and getting a final order back from the court indicating that all necessary steps have been followed and the executor can distribute the assets. In Iowa, the executor files a final report showing how the property is passing to the heirs.
6. Distributing the Assets: Finally, after all five other phases are completed, the executor may distribute the assets of the deceased to his or her heirs.

Probate involves a lot of steps and requires a certain level of expertise or familiarity with the process to be efficient at it. It is always smart to seek the assistance of an attorney in the event that you are appointed as executor of a loved one’s estate. Contact us by phone or e-mail to see how we can help you through the probate process.

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Lawyer Joke of the Day:

Nugent needed legal advice, so he walked into the office of Gregory, Ellis and Gregory. Nugent sat down at the desk of the senior member of the firm.

"If you're not in really bad trouble, I'll take the case," said Gregory. "If you're in a real jam and want to get out of it, my partner will handle it.

“If, on the other hand, you're not involved and want to get in trouble, my son, who just graduated from law school, will take it!"

Three Questions About Probate: Part One

“Death is not the end. There remains the litigation over the estate.”

- Ambrose Bierce

The death of a loved one is a difficult time in anyone’s life. Being thrust into the role of executor can sometimes feel overwhelming. At my initial meeting with an executor of an estate, I often find that the best place to start is to answer the the three questions that are the subject of my next three blogs. First:

What is probate?

“Probate” can be used in two different ways. As a noun, “probate” means the judicial process of validating a will. A will must be submitted to the courts to make sure first that it is valid, second that its terms are legal, and third that its terms are carried out. As a verb, “probate” is the procedural steps an executor takes to settle an estate. Taking these steps is known as probating the will.

You may have noticed that one thing is consistent in both of these definitions: a will. In order to use the term “probate,” the deceased person must have prepared a will. If there is no will, it is not probate. There is still a procedure for distributing the estate, however. That procedure is called administration, and we’ll talk about it more on Friday.

Probating a will can take several different forms. If people know anything about probate, they almost always know about the judicial proceeding. This, however, is not always the most appropriate means of probating an estate. An estate with a low total value and no debts might qualify for a simple procedure called “small estate administration.” In Iowa, the maximum value for small estate administration is $100,000.

In even smaller estates, an affidavit can suffice in place of the probate process. To utilize this method, the estate must have a value of less than $25,000 and cannot include real property. The waiting period required before an estate can be closed is forty (40) days.

Choosing an inappropriate or improper method of dealing with your estate can be fatal. Always seek the advice of an attorney when dealing with a complex issue like probate.

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Lawyer Joke of the Day:

"You seem to be in some distress," said the kindly judge to the witness. "Is anything the matter?"

"Well, your Honor," said the witness, "I swore to tell the truth, the whole truth and nothing but the truth, but every time I try, some lawyer objects."