Trust vs. Life Estate

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Question:  My parents are concerned about protecting their home.  Some people have recommended that we consider creating a trust while others have suggested that they transfer the house to my siblings and me, with my parents retaining a life estate, which is a better idea?

Answer:  This issue comes up often in our practice.  For starters, an explanation of the two planning tools is probably necessary so that you can make the choice that is best for you.  A deed with a life estate legally transfers the title of property to a designated party after the death of the original party.  The original party retains the right to live in the house and is responsible for all household expenses.  A transfer of a deed into an irrevocable trust transfers the title of property to the beneficiaries of the trust after the death of the trust creator.  Like a deed with a life estate, the creator of the trust retains the right to live in the house and is responsible for all household expenses.  The trust is considered a Grantor Trust for tax purposes, meaning that the Grantor is still considered the owner for tax purposes.

A deed with a life estate and a deed to an irrevocable trust both start the five-year look-back with respect to Medicaid planning and asset protection.  Both transfers would allow your parents to retain certain rights with respect to lifetime use of the property including tax benefits associated with ownership including enhanced star benefit, Veteran’s benefit and any capital gains exemptions they would otherwise be eligible to receive.  However, there are several benefits to a deed transfer to an irrevocable trust over a deed with a life estate.

First, transferring the house to an irrevocable trust would give your parents more flexibility than a deed with a life estate.  For example, if a deed with a life estate needed to be transferred back to your parents and one of the children refuse to sign the deed; the parent would have no recourse to get the property back into their names.  Additionally, the property could be subject to the children’s creditors and/or divorcing spouses.  Contrast that with a transfer to an irrevocable trust, the Grantor would be able to amend or revoke the irrevocable trust with permission from the beneficiaries and the Grantor would maintain the ability to change beneficiary at any time.  Therefore, if a change was required and one of the children did not agree, the Grantor could simply remove that child and make the change.

Another reason to transfer the house to an irrevocable trust is that if the property is sold during the Grantor’s lifetime, the Grantor would retain the capital gains exemption of $250,000.00.  If the property is sold with a deed with a life estate, the parent would only be able to use the capital gains exemption with respect to the value associated with the life estate which would only be a portion of the total value of the property.

The transfer into an irrevocable trust offers flexibility in planning, maintenance in any current tax exemptions and complete asset protection.  In order to determine which option is best for your individual situation, you should consult an elder law attorney in your area. Learn more about estate planning here.

Nancy Burner, Esq.

Burner Law Group, P.C.

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