Jan Neal Law Firm LLC

Alabama Elder and Special Needs Law


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Deeding Property with a Reserved Life Estate

agreementThe term “life estate” often comes up in discussions of estate and Medicaid planning, but what exactly does it mean? A life estate is a form of joint ownership that allows one person to remain in a house until his or her death, at which time it passes to the other owner, referred to as the person with the remainder interest. Life estates can be used to avoid probate while giving a house to children without losing the ability to live in the home, remaining responsible for property tax – with the benefit of homestead and age related tax exemptions, remaining responsible for homeowner insurance, yet creating ownership in the children at the death of the parent.   This type of deed can play an important role in Medicaid planning since Medicaid does not assign any value to a life estate when the parent applies for Medicaid to pay for nursing home care.  If the transfer occurred prior to five years before application, there will be no penalty for the transfer.

In a life estate, two or more people each have an ownership interest in a property, but for different periods of time. The person holding the life estate — the life tenant — possesses the property during his or her life. The other owner — the remainderman — has a current ownership interest but cannot take possession until the death of the life estate holder. The life tenant has full control of the property during his or her lifetime and has the legal responsibility to maintain the property as well as the right to use it, rent it out, and make improvements to it.

Another example of use of life estates is when a spouse who owns property in only his or her name wants to leave that property to his or her children from a former marriage but wants the later in life spouse to be protected and have a place to live.  That person might write a will leaving a life estate to the spouse with the remainder to his or her children on the death of the spouse.  This comes up not infrequently when individuals want to protect property passed to them by family and who want to keep that property in their blood line while protecting the spouse as well.

When the life tenant dies, the house will not go through probate, since at the life tenant’s death the ownership will pass automatically to the holders of the remainder interest. Because the property is not included in the life tenant’s probate estate, it can avoid Medicaid estate recovery in states that have not expanded the definition of estate recovery to include non-probate assets, which includes Alabama at the time this is being written.

Although the property will not be included in the probate estate, it will be included in the taxable estate. Depending on the size of the estate and the state’s estate tax threshold, the property may be subject to estate taxation.  However, the joint federal lifetime estate tax exemption and gift tax exclusion is $5,490,000, so few people are actually subject to estate tax.

The life tenant cannot sell or mortgage the property without the agreement of the remaindermen. If the property is sold, the proceeds are divided up between the life tenant and the remaindermen. The shares are determined based on the life tenant’s age at the time — the older the life tenant, the smaller his or her share and the larger the share of the remaindermen.

Be aware that transferring your property and retaining a life estate can trigger a Medicaid ineligibility period if Medicaid application is made within five years of the transfer. Further, purchasing a life estate should not result in a transfer penalty if you buy a life estate in someone else’s home, pay an appropriate amount for the property and live in the house for more than a year.

For example, an elderly man who can no longer live in his home might sell the home and use the proceeds to buy a home for himself and his son and daughter-in-law, with the father holding a life estate and the younger couple as the remaindermen. Alternatively, the father could purchase a life estate interest in the children’s existing home. Assuming the father lives in the home for more than a year and he paid a fair amount for the life estate, the purchase of the life estate should not be a disqualifying transfer for Medicaid.  Just be aware that there may be some local variations on how this is applied, so get good advice before finalizing arrangements involving a life estate if long term care could be a future concern.


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Quarterly Newsletter Available

shutterstock_63936919Our quarterly newsletter, Elder Law Bookmarks, was sent today.  Articles included in the newsletter are:

  • People with Disabilities Can Now Create Their Own Special Needs Trusts
  • Is it Better to Remarry or Just Live Together?
  • Repealing Obamacare Will Have Consequences for Medicare
  • For Better or Worse, States Are Turning to Managed Care for Medicaid Long-Term-Care
  • Make Reviewing Your Estate Plan One of Your New Year’s Resolutions

If you want to be added to the mail list, send an email to neal@janneallaw.com.

 


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Elder Law Training at OLLI

olli-materials-first-page

On October 10, 2016, Jan taught the first of a two part presentation on Elder Law at  Osher Lifelong Learning Institute (OLLI) at Auburn University entitled Elder Law:  Enhancing the Lives of Seniors Through Education, Planning For What Comes Next.  The second session will be taught on Monday, October 17, 2016, at 2:30 p.m. at The Clarion in Auburn, Alabama.  

Topics covered in this training include:  Older Americans Act Legal Assistance; Important Documents Needed for Proper Planning; Authority Issues; Long-term Care Levels of Care and Payment Options; Medicaid for Long-term Care; Special Needs Planning; Probate; Administration of Estates; Planning for Last Remains and Funerals.

A 39 page Keynote presentation covering these topics is provided to course participants.

Anyone interested in this and the many other learning opportunities available through OLLI can learn more by visiting the OLLI website.


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How Much Cash Will Your Estate Need?

shutterstock_279469625When an estate is being settled in Alabama, it will take six months or longer before the assets in the probate estate can be distributed.  I frequently advise people to plan for this and to designate a bank account jointly titled to themselves and the person they have named to be the personal representative (aka executor) of their will so that funds will be available for any immediate cash needs.  Another source of cash may be life insurance with the beneficiary designated as the person who will be responsible for the estate.

Historically, one main reason to buy life insurance as part of an estate plan was to have cash available to pay estate taxes. Now that the estate tax exemption is so large (in 2016, estates can exempt $5.45 million per individual from taxation), most estates don’t pay federal estate taxes.  If someone dies in Alabama with less than the $5,450,000 exemption amount, his or her estate will not owe federal estate tax, and there is no Alabama estate tax. The heirs and beneficiaries will inherit the property free of tax as it relates to the federal government and Alabama (but they may owe estate tax in another state). So the use of life insurance for estate tax reasons is greatly diminished, however, life insurance can still be helpful in a number of other ways.

Life insurance provides cash to use for the payment of home expenses for property held in the probate estate (such as utilities, mortgage payments, maintenance, insurance, property tax), debt, burial fees, or estate administration fees and expenses, replacement of income or assets lost to pay for long-term care, funds for a trust for a minor child or a child with special needs, buying out a business interest, funding charity, or balancing the interests between heirs to non-probate property (e.g. if one child is inheriting a certificate of deposit, a life insurance policy can ensure that the other child receives the same amount).

It is important to think through the property you own and determine what will be part of your probate estate and what will fall outside the probate estate and plan for enough liquidity to make the settling of your estate manageable for those charged with that responsibility.


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Elder Law at OLLI

Jan is teaching a two part course on Elder Law at Osher Lifelong Learning Institute at Auburn University (OLLI at Auburn).  See page 11 of the OLLI Spring 2016 catalog for the course description.  The first session is Wednesday, March 30, 2016, from 10:15 a.m. – 11:45 a.m., and the second will be on Wednesday, April 6, 2016, from 10:15 a.m. – 11:45 a.m.  Topics to be covered include Older Americans Act Legal Assistance, Authority Issues and Advance Directive Options, Long-Term Care Planning, Long-Term Care Payment Options Including Medicaid, Special Needs Planning, Probate, Administration of Estates and Funeral Planning.  If you aren’t a member of OLLI, check out all the benefits and learning opportunities here.

Materials for the training can be downloaded at elder-law-training-for-olli-at-auburn-033016-60244085 and will be posted at this site soon.