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Trust vs. Life Estate

Trust vs. Life Estate


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 to house to me and my siblings and retain 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.  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.  Both allow the original owner to retain the right to live in the house and be responsible for all household expenses. 

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.  Both would allow your parents to retain certain rights with respect to lifetime use of the property including tax benefits associated with ownership.  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.  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.  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 ($500,000.00 for a couple) and all proceeds from the sale would be protected within the trust.  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 and that portion would have to be paid to your parents at closing.  This amount would not be protected if Medicaid was needed.

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.           



-          Robin Burner Daleo, Esq. 



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