To create a comprehensive estate plan that successfully achieves all your goals you must use a variety of estate planning tools and strategies. One estate planning strategy that can help with probate avoidance and tax avoidance as well as protect your home if you ever need to qualify for Medicaid (Medi-Cal in California), is a life estate. To help you understand how one might fit into your estate plan, the Los Angeles estate planning attorneys at Schomer Estate & Wealth Advisors explain how a life estate works in California.
What Is a Life Estate?
When you own real property, you have legal ownership interest in the property. There are various types of ownership interest you can have in real property. For example, you could own the property jointly with rights of survivorship with a spouse or adult child or as tenants in common with a business partner. Another type of ownership interest is a life estate. A life estate gives the life tenant owner the right to use and live on the property for the life tenant’s lifetime. When a life estate is created there must also be a remainder owner. All ownership rights in the property automatically revert to the remainder owner upon the death of the life tenant owner.
What Are the Advantages and Disadvantages to Creating a Life Estate in California?
Like all ownership options, there are advantages and disadvantages to creating a life estate. Some of the advantages include:
- Simplicity. Creating a life estate only requires a new deed to be drafted and recorded.
- Probate avoidance. Ownership automatically transfers to the remainder owner upon the death of the life tenant owner.
- Protection. Unlike a lease tenant, a life tenant enjoys an absolute right to use the property that cannot be infringed upon by the remainder tenant or by creditors of the remainder tenant.
- Tax benefits. A stepped-up basis is used when property is transferred upon the death of a life tenant.
- Long-term care planning. If a life estate is established prior to the applicable look-back period, the property is protected from Medicaid spend-down or the Medicaid Estate Recovery Program (MERP).
Some disadvantages to creating a life estate that are worth considering include:
- Taxes. If the property is sold during the life of the life tenant, the life tenant won’t get the full income tax exemption and the remainder owner usually has to pay capital gains taxes.
- Medicaid. If you don’t transfer the property into a life estate prior to the look-back period a life tenant may be subject to a waiting period for Medicaid benefits.
- Sale. To sell or encumber the property, both the life tenant owner and the remainder owner must agree.
For many people, the advantages of creating a life estate far outweigh the disadvantages. Because every estate plan is unique, however, it is in your best interest to consult with your estate planning attorney if you are considering the creation of a life estate within your estate plan.
Contact Los Angeles Estate Planning Attorneys
For more information, please join us for an upcoming FREE seminar. If you have additional questions or concerns about how a life estate works in California, contact the experienced Los Angeles estate planning attorneys at Schomer Estate & Wealth Advisors by calling (310) 337-7696 to schedule an appointment.
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