Whether you are just starting out in your career or you have been working and saving for years, you undoubtedly want to protect the assets you have managed to amass to date. Including asset protection tools and strategies in your estate plan is one way to do that. Fortunately, there are a wide range of asset protection tools available to incorporate into your overall estate plan. When used strategically, a life estate can be one of those tools. For those who are unfamiliar with a life estate, the asset protection attorneys at German Law Group provide an explanation.
Why Do I Need to Worry about Asset Protection?
People often focus a tremendous amount of effort on the acquisition of assets; however, they fail to understand the importance of protecting the assets they acquire. Whether you realize it or not, there are a number of potential threats to your assets, including:
- Divorce – keeping your separate property separate helps protect assets from being lost in a divorce; however, marital assets are always at risk. Furthermore, assets you pass down to an adult child could be lost to an in-law in your child’s
- Economy – prudent and conservative investing can help protect against an economic downturn but no financial plan is completely recession-proof.
- Creditors — you cannot predict the future. A tragic accident or debilitating medical condition could wreak havoc with your finances and have creditors pounding on the proverbial door.
- Beneficiaries – leaving assets to a spendthrift beneficiary, or one who has an addiction problem, is a sure fire way to lose those assets.
- Long-term care costs – this is often overlooked in retirement and estate planning. The high cost of LTC could deplete your retirement nest egg in short order if you cannot qualify for Medicaid. Qualifying for Medicaid, however, could also put your hard-earned assets at risk if you failed to plan ahead.
What Is a Life Estate and How Can It Help Protect My Assets?
A life estate is a type of joint ownership. The parties to a life estate are referred to as the “life tenant” and the “remainderman.” The life tenant has the right to live in the home for his or her lifetime. At the time of the death of the life tenant, the property passes directly to the remainderman.
While the life tenant has possession of the property, he or she has all the rights and responsibilities of ownership except the right to mortgage or sell the property without the consent of the remainderman. A life tenant can live in the property, rent the property to a third party, or improve the property. In addition, the life tenant has the responsibility to maintain the property and pay taxes on the property.
Upon the death of the life tenant, title to the property automatically passes to the remainder without the need for the property to go through probate. Although a life estate is not part of the probate assets, it is part of the taxable estate. Consequently, the value of the life estate is included when calculating federal and/or state gift and estate taxes.
The fact that the estate is not part of the probate estate usually protects the property from the Medicaid Estate Recovery Program (MERP). If you are unfamiliar with MERP, it allows states to seek compensation from the estates of Medicaid beneficiaries after their death.
Along with protecting an estate from MERP after your death, creating a life estate can help you qualify for Medicaid while you are alive. Both the life tenant and the remainderman own an interest in a life estate. The older you are at the time your interest is calculated, the smaller the value of your life interest will be and the greater the value of the remainderman’s interest in the property will be. When determining your “countable resources,” only the value of the life estate you hold will be considered instead of the total value of the property. This alone can dramatically reduce the total value of your “countable resources” for Medicaid eligibility purposes, ultimately providing an excellent asset protection strategy.
Contact Asset Protection Attorneys
If you have additional questions or concerns regarding life estates, or asset protection in general, contact the experienced asset protection attorneys at German Law Group by calling 701-738-0060 to schedule an appointment.