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  • Daniel Rodriguez

Life Estates as an Estate Planning Tool

A life estate may be an effective estate planning tool when the goals are to preserve a home for elderly parent(s) for Medi-Cal planning purposes, and to allow the elderly parent(s) to retain possession. In the absence of proper Medi-Cal planning, the family home may have to be sold to pay for nursing home care incurred by an elderly parent who receives just a few months of nursing home care. A life estate is one of several options to consider in efforts to preserve the family home. Questions about estate planning? Contact a Roseville estate planning attorney of NewPoint Law Group, LLP.

Why Use a Life Estate?

A life estate is a type of deed where the owner retains her interest in the property for her life with the “remainderman” to receive the property upon her death. Typically, the life tenant will be the elderly parent and the remainderman will be the children.

As compared to an outright gift or grant deed from the parent to the children, a life estate gives protection to the elderly parent who wants to retain her legal right to possession, so that she leaves on her terms and when she is ready.

There are several benefits to using a life estate. One benefit is that probate will be avoided upon the death of the life tenant as fee title will transfer to the remainderman automatically. Further, the remainderman receives a “stepped-up” basis for purposes of capital-gains taxes.

Another benefit is that the family home will not be considered an asset of the life tenant and the remainderman will not have a Medi-Cal lien placed upon the property so long as the life tenant can wait the prescribed five years before applying for Medi-Cal benefits, such as nursing home care. This five year waiting period is an example of the importance of being proactive in estate planning.

A disadvantage of a life estate is that it creates joint ownership that may create or result in conflict among and between the co-owners. A life estate, once created, cannot be unwound unless all co-owners agree. Any time joint ownership exists, the property may be exposed to the creditors of any of the co-owners.

Nor can the property be used as collateral for a loan or be sold unless all co-owners agree. If the life tenant is unable to consent to a sale as a result of incapacity, the property cannot be sold in the absence of a duly executed and durable power of attorney or conservatorship.

Additionally, there are usually split duties of ownership between the life tenant and the remainderman. If the life tenant does not pay the ongoing expenses of ownership, i.e., taxes, insurance, and maintenance, the interests of the remainderman may be put at risk. This may be a source of conflict. The life estate may also trigger a federal gift tax issue and the need to file an annual federal gift tax return.

Rely on Our Experienced Sacramento Tax Attorneys

Because of the tax considerations, it is wise to consult with a Sacramento tax attorney. Careful thought should be given to use of a life estate. It may be a desirable estate planning tool with proper planning that takes into consideration Medi-Cal rules, regulations, and tax consequences.

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