Real estate is the cornerstone of stability for millions of Americans. Buying your own home is part of the American dream for most people, and we work hard to make sure we work toward that goal. Once achieved, we also work hard to protect the asset. It is common for people to want to pass that asset down to their children. There are a variety of estate planning techniques that can be used to effectuate this, ranging from a simple last will and testament to complex trusts. One method that can be used is called a life estate.
A life estate is a method of deeding your real estate to your children. With a life estate, you reserve the right to reside in the home until your death. The children are then referred to as the “remainderpersons,” meaning the people who are entitled to the real estate once you, i.e. the “life tenant,” passes away. Before your death, you would be responsible for the upkeep of the property, payment of any property taxes, and would entitled to receive any income the property generates. A life estate does not make the remainderpersons joint tenants.
One of the primary advantages of using a life estate is that typically the real estate will pass automatically to the remainderpersons without the need for the real estate to pass through probate. If you choose to leave the property to your children just using a will, the property will have to pass through probate, which can be costly and time-consuming.
People considering using a life estate should keep in mind that using a life estate will not mean that the property is completely immune from collection if the life tenant receives state assistance in the form of Medicaid. In Minnesota, the state has the ability to place what is referred to as a “zombie lien.” This means that the state can place a lean on the value of the life estate to try to recover some of the costs of the care through Medicaid received by the life tenant before his or her death.
You should also keep in mind that using a life estate does not lower the value of your estate for estate tax purposes. Unlike a trust, which removes the property from your ownership and transfers it to the trust, the property is still owned by you at the time of your death and the value will therefore be included for estate tax purposes.
If you have questions about real estate and your estate plan, call us today at (651) 371-9117. We can talk with you about your assets and your goals.