King & Wood, P.A.

Life Estate Questions Answered

“With a life estate, there are two types of property owners.”

A recent article in USA Today, “Estate planning: Consider a life estate deed,” explains that a life estate is a way to transfer real estate to your beneficiaries during your lifetime.  However, it still allows you to keep the right to use and/or live on the property for the rest of your life. This simple process has some tax advantages, and it’s a way to avoid probate on the real estate.

The life tenant has the exclusive right to use the property during his or her lifetime. In many cases, this is a joint life tenant, like a husband and wife. The life tenant must maintain the property and pay the taxes and insurance. The remainderman has the exclusive ownership rights and responsibilities after the life tenant(s) die. At that point, the full ownership automatically transfers to the remainderman—without any probate or court filings. At this point, there’s what’s known as a full step up in basis, which provides capital gain tax advantages to the remainderman.

If a property is sold when there is a life tenant, both the life tenant and the remainderman must approve the sale. If both parties agree to the sale, then the life tenant will get a percentage of the sale proceeds (based on the life tenant’s age) and the remainderman will receive a percentage of the proceeds.

It is important to note that there may be an issue for the life tenant, if he or she is receiving or planning to qualify for Medicaid benefits. An estate planning attorney can help plan the sale properly, so the proceeds may not need to be spent down on the cost of care.

Life estates were used in the past as a way to protect real estate from potential long-term care costs and to keep control over the real estate during one’s lifetime. After five years lapsed from the transfer date, prior to applying for Medicaid, the property was protected from the cost of care. When applying for Medicaid for long-term care costs, the state usually wouldn’t calculate a life estate as an available asset.

However, some states have passed laws providing that all life estates created on or after a certain date are thereafter subject to estate recovery. This means that upon the death of a person receiving Medicaid benefits, the state could recover a percentage of the value of the life estate property, with the percentage determined by the age of the Medicaid recipient at the time of death. In these states, a life estate deed wouldn’t be the best way to preserve real estate from the cost of potential long-term care.

Life estates aren’t the best solution for everyone. Talk with an experienced estate planning attorney to determine the best ways to achieve your goals.

Reference: USA Today (February 27, 2017) “Estate planning: Consider a life estate deed”

Is Protecting Homes with Trusts a Good Idea?

“The key to any kind of asset protection planning, is that it must take place well before the need to be protected arises.”

The owner of a California townhouse in a homeowner’s association should examine his or her escrow documents, title report, property deed and the association’s governing documents, rather than relying just on the physical appearance of the property to know exactly what type of property was purchased. This is according to a recent article in The Los Angeles Times, “Trusts aren't a surefire way of making your HOA property judgment-proof.” The owner might want also to ask about placing real estate assets into a family trust to protect against future lawsuits with the HOA.

There are several legal distinctions between condominiums and Planned Unit Developments (PUDS)—the ownership of common areas is one of the most cited.  However, whether a townhouse or a single-family dwelling is part of a PUD or condo development, both are deed-restricted properties subject to homeowner associations regulated by California’s Davis–Stirling Common Interest Development Act in the California Civil Code. A power reserved for the board of all common interest developments is the right to place a lien on the property of an owner who violates the covenants or fails to pay on some association-related debt. The lien lets the board foreclose on and take that property to satisfy the debt.

This is tough for estate planning, because if a lien is applied to the property and the owner passes away, the estate can be attached. This keeps the property from passing to the owner’s heirs until any outstanding debts are paid.

Unfortunately, the most commonly used trusts won’t protect these assets.

Revocable Trusts

When folks talk about a “family trust” or “living trust,” they usually mean a “revocable trust.” This is where the grantors maintain ownership and control over their property during their lives. At death, the control goes to a trustee who then further administers or distributes the assets without having to go through probate. These trusts are “revocable” because the grantors can make changes to the terms, distribute assets early and even revoke the whole deal.  However, the assets in the trust are still subject to taxes and are not protected from creditors, litigation or foreclosure both during the lifetime and after the grantor’s death.

Irrevocable Trusts

By contrast, irrevocable trusts provide the creditor protection to the grantors, but only if they’re created for legitimate estate planning purposes. However, in an irrevocable trust, the grantors give up control over the assets placed in that trust—they can’t amend nor revoke the trust during their lifetimes. When the trust is created, the grantors must choose who they want to have their property when they die. That decision can’t typically be changed, and real property can be difficult or impossible to sell or refinance while it’s in the trust.

While there is no foolproof way to protect residential deed-restricted property from litigation with an HOA, especially property that is rich in equity, the key to any asset protection planning is to do this long before the need to be protected arises.

Reference: Los Angeles Times (February 4, 2017) “Trusts aren't a surefire way of making your HOA property judgment-proof”

The Truth about Living Trusts

“A Living Trust is totally private–as opposed to your Will, which becomes public when it is probated after your death.”

A recent nj.com article, “Living Trusts explained,” says that you should think of a living trust as a contract between the current “you” and the future “you.” Practically speaking, it can also duplicate and/or replace the provisions of your durable power of attorney and even your will.  This is how a living trust addresses three major concerns:

1. Real estate in another state. Laws are different in each state, so estates may be treated differently. There are some states that include all owners of property within their state in their tax laws. When the real estate owner is a trust, those rules don’t apply. You also avoid a potential battle with another state about your residency and property ownership.
2. Meddling relatives. All trust documents are private, so family meddlers won’t have access to your affairs. The people you designate will know who’ll be managing your finances and who gets what when you pass away.
3. Health issues of one or both partners/spouses. If you know that some conditions "run in the family" or are concerned about dementia as you age, a living trust can detail all of your wishes. It can also make provisions for carrying out your wishes in the event you’re unable to manage your affairs. Your designated successor trustee will immediately step in to support you and take over.

A living trust is revocable, so at any point you can change your mind and change any provision … or get rid of the whole thing. However, when you die, the living trust becomes irrevocable and directs the disposition of your estate. You’ll still need a will, but that includes language referring to the living trust for instructions and details.

Make sure you have the trust document prepared by an experienced estate-planning attorney who specializes in this area. If you decide that a living trust is right for you and have the document prepared by an attorney, you need to change the title of your accounts and assets from you to the name of the trust. A living trust can provide comfort and reduce stress for your family.

Reference: nj.com (November 13, 2016) “Living Trusts explained”