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The Good and the Bad of Life Estate Deeds

I am fascinated by estate planning for a couple of reasons. First, so many of us are terrified to talk about it, although there is no avoiding the inevitable, and second, because it seems intimidating, but there are so many options out there to preserve our wealth and pass it on to our loved ones, yet it is still somewhat mysterious to many. Hopefully, I can help shed some light available options.

Today I wanted to let my readers know about Life Estates - next week, I will discuss the Transfer on Death Deed, and compare it against the Life Estate Deeds.

Life Estate Deeds are a great tool which allows parents transfer property to their heirs, all while maintaining the right to use the property during their lifetime. The parents would remain financially responsible for taxes, insurance and the cost to maintain the property, however, on their passing, it would transfer to their heirs, thus avoiding probate. Life Estates create two owners - the Life Tenant Owner (the one maintaining and financially responsible) and the Remainder Owner, the heirs who will benefit from the property after the death of the Life Tenant Owner.

The Advantages of a Life Estate Deed are as follows:

1. A Life Estate Deed is prepared and recorded in the County Clerk's Office, which is less expensive and saves time, Living Trusts take some time to set up, and are typically more expensive to set up.

2. Life Estates avoid probate, the property transfers to Remainder Owners upon Life Tenant Owner's death. Remainder Owners will need a copy of the death certificate, affadavit of death and the Life Estate Deed, these documents are then recorded with the County Clerk to transfer the property.

3. Remainder Owners will receive a stepped up tax basis as of the date of death of the Life Tenant Owner, helping with capital gains taxes.

4. After five years of setting up the Life Estate the property should be protected from Medicaid liens for end of life care.

5. Life Tenants have the right to use and live in the property.

There are also potential pitfalls with Life Estates, consider these ideas before proceeding:

1. Life Estates are irrevocable, meaning, if you change your mind you have to get the approval of all remainder owners (heirs). Even though the Life Tenant Owner retains control over the property and is on the hook for all of the financial liabilities, they cannot sell the property or take the property out of the Life Estate without approval of all owners.

2. If the Life Tenant Owner decides to sell the property and Remainder Owners agree, there may be a loss of certain tax benefits. In addition the Remainder Owners may owe taxes on their portion as well.

3. Medicaid should be considered. The clock starts ticking once the Life Estate is recorded, so if you need Medicaid shortly after recording, you could be disqualified from receiving those benefits.

If you are considering a Life Estate Deed, it's best to speak with an attorney and weigh your options.

On January 1, 2016 Assemby Bill 139 went into effect in California. This allows property owners to record a Transfer on Death Deed. This deed still avoids probate, and is revocable. However, there are limitations, the Transfer on Death Deed only applies to single family homes/condominium units, a single family home on 40 acres or less of agricultural land, or a residence with no more than 4 residential dwelling units.

I will lay out the specifics of the Transfer on Death Deed next week.

If you have any questions or are interested in transferring your property, please feel free to contact me at (925) 336-5711.

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