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The advantages and disadvantages of life estates vs. living trusts

by Legacy Plan
August 9, 2016

For many people considering estate planning, their family home is their most valuable and most treasured asset. Multiple different options exist for transferring that home to your loved ones after you die. Some options, like life estates, come with benefits, but may also leave your home exposed to your beneficiaries' creditors or ex-spouses if they're sued. Other options may provide similar or equal benefits without as much risk.

If you're like a lot of families, your most important possession, and likely one of your most monetarily valuable possessions, is your family home. When it comes time to tackle estate planning, you may already have a beneficiary (or beneficiaries) in mind for your home. But there are lots of different ways to accomplish transferring that home to your intended recipients. Each one comes with its own unique set of positives and negatives.

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Life estates are legal arrangements where an owner (or owners) reserves the right to possess a property for the remainder of their lives and, after they die, then the property goes over to the recipients named in the life estate deed. For example, a married couple creates a life estate deed that transfers their home to their two children, but reserves a life estate for them. In that scenario, the home remains in the possession of the parents for as long as either is alive. When they both have died, then the home goes to the children.

This technique involves several benefits. It allows the parents to stay in their home until they die. It transfers the home to the children without requiring probate. It also may allow the family to maintain certain capital gains exclusions that provide tax benefits if or when the family decides to sell the home.

However, it also has certain distinct drawbacks. Unlike living trusts or transfer-on-death deeds, life estates are not very flexible. Once you've named a beneficiary to receive the property after your life ends, it is very difficult to alter that beneficiary should you change your mind later. Additionally, using a life estate creates certain legal exposure should one of the people you've named as beneficiaries be sued, get divorced or declare bankruptcy. If that happens, that ex-spouse or creditor may be able to stake a legal claim to your home.

With a living trust, you may be able to avoid some or all of these pitfalls. Just like the life estate, using a living trust means that the property will transfer without requiring probate. Also, the Internal Revenue Service's regulations make it clear that, even if you've titled your home in a living trust, the full capital gains exclusion applies when the property is sold. So, the living trust offers the same upsides in these areas as a life estate. However, with a living trust, you have much greater flexibility if you decide you want to change your beneficiaries. Also, using a living trust protects the property in the event your beneficiary is sued, gets divorced or goes bankrupt.

Finally, in some situations, you may need to maintain a life estate in order to be eligible for certain property tax benefits, like a disabled veteran's homestead exemption. Be aware that, if you're in such a circumstance, you still have the option of using a life estate in tandem with a living trust. Your estate planning attorney can explain all of the avenues that are available to you and which makes the most sense for you.

How do I create an estate plan?

There are numerous options and scenarios to consider when developing an estate plan that protects your legacy and achieves your objectives, and important decisions should be made with the advice of qualified lawyers and financial experts. Membership with Legacy Assurance Plan provides members with valuable resources and guidance to develop comprehensive estate plans that take life's contingencies into consideration and leave a positive impact for generations to come. Legacy Assurance Plan members also receive peace of mind that a team of trusted, experienced professionals will assist them in developing legal, financial and tax strategies that will meet their needs today and for years to come through periodic reviews.

This article is published by Legacy Assurance Plan and is intended for general informational purposes only. Some information may not apply to your situation. It does not, nor is it intended, to constitute legal advice. You should consult with an attorney regarding any specific questions about probate, living probate or other estate planning matters. Legacy Assurance Plan is an estate planning services company and is not a lawyer or law firm and is not engaged in the practice of law. For more information about this and other estate planning matters visit our website at legacyassuranceplan.com.

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