Is a Life Estate Deed the Best Way to Avoid Probate?

Many people want to avoid probate. Probate is the complex, time-consuming, and costly legal process to distribute someone’s assets to their heirs or beneficiaries after they die. The court appoints the executor named in the Will (if there is no Will it will be distributed according to the State’s intestacy Laws) to administer according to the probate process. The Will must be authenticated and proven valid. Assets, liabilities, and beneficiaries must be identified. Then begins a detailed Inventory and Accounting process that involves collecting the estate assets, paying any estate liabilities, and finally distributing the remaining assets to the beneficiaries. The whole process of settling an estate can take well over 16 months in Virginia.

A traditional life estate deed is one way to transfer property on death without going through probate. In a typical scenario, a current homeowner divides the property into two different time-stacked property interests: the current life estate and the future remainder interest. The current owner becomes a lifetime tenant (the life estate) and can remain in the home. At death, the home passes to the designated remainder beneficiary. For the right scenario, the life estate deed is a relatively simple and low-cost way to transfer property at death and avoid probate. But it is not always the best strategy.

If you are considering a life estate deed as a tool to continue to live in your home and to pass it along without probate after your death, here are some possible risks to consider.

  • Taxes: This kind of transfer avoids probate, but the property may still be subject to estate taxes. Additionally, if the home is sold during your lifetime, income tax issues may arise. The principal residence exclusion on capital gains tax may be reduced or lost entirely.
  • Medicaid Lookback: A life estate deed will count as a gift so if you need to apply for Medicaid to pay for assisted living within five years of the transfer, the penalty period will be in effect.
  • Limited Control: You can no longer sell or mortgage your home unless the remainder beneficiary agrees to transfer the property back to you.
  • Creditor Risk: The property becomes subject to your remainder beneficiary’s actions. You may have to deal with the remainder beneficiary’s bankruptcy trustee, divorcing spouse, or personal injury plaintiff.

While a life estate deed may be a solution for some limited situations, there are a lot of moving pieces to consider in estate planning. Work with a knowledgeable and experienced attorney. Wilson Law PLC has the experience and knowledge to help you assess a variety of strategies to pass along your assets as effectively and efficiently as possible. Call us today at 866-603-5976 to set up a meeting or fill out our contact form and we’ll call you to schedule your meeting.