Some people work their whole lives to save money so that so that their families are taken care of should they pass away. As they age, many of these people become concerned that their assets will be depleted should they need long term care. This is a legitimate concern and many try to protect their main assets, such as the family home using estate planning. One estate planning tool used for this purpose is the life estate. Although life estates can be useful in many situations, a person might be better off using another approach.
Essentially, a life estate is where the owner of property transfers this property to another but retains the right to live there for a period of time and continues to be responsible for the expenses associated with the property. Parents often use this tool to transfer the family home to their children with the stipulation that they are allowed to live out their time there. If the life estate is created properly and within the requisite period of time, this can be a beneficial situation for everyone. The parents do not have to worry about losing their home as a result of long term care costs and continue to have a place to live, while the children receive an inheritance. Unfortunately, as beneficial as this tool is, it can still be risky depending upon the situation.
There are many risks involved with granting a life estate to children. First, the children’s creditors may be able to reach the property. After the life estate is created, the children are considered the owners and if they incur liability, creditors can collect by placing a lien on the property. Although the children might not have any foreseeable liabilities, should they get divorced or sued, they might incur some. Also, since the children are considered the owners of the property, they will have to agree to any sale or transfer of the property going forward. Again, this might not seem like a problem now, but can become one in the future. Divvying up the proceeds in these situations can also be complicated. In addition, there certain tax implications associated with the creation of a life estate that could end up costing the parent and their children substantial sums of money. For these reasons, a life estate might not be the best tool if you are concerned about protecting your assets. A revocable living trust can offer the same if not more asset protection and might be a better option.
If you are considering estate planning to protect your assets from long term care costs, you should speak with a qualified attorney as soon as possible. Orange County, CA estate planning attorney Brian Chew can help. Call (949)347-5256 to schedule a consultation today.