| Read Time: 5 minutes | Estate Planning

Life Estate vs Trust

A life estate lets someone use property for life, with ownership passing to a beneficiary after death. A trust, managed by a trustee, controls assets for beneficiaries and offers more flexibility, tax benefits, and avoids probate.

Preserving our assets for future generations can be a difficult task. There is a large array of estate planning tools at our disposal, and choosing the right ones for your needs requires careful thought and consideration. This dynamic is particularly true if we wish to protect our assets from the rising threat of nursing home costs, Medicaid costs, and excess taxes. Losing a family house to Medicaid or other creditors is a fate no one wants for their loved ones.

Life estates and irrevocable trusts are two legal tools you can use to protect your assets for future generations. Each of these legal arrangements effectively puts future ownership of an asset in the name or names of someone you choose. Transferring a right of ownership prevents creditors and the government from going after assets under certain circumstances. This allows you to access services like Medicaid without worrying about qualifying or the government coming after your assets.

When you create a plan to protect your assets, it is essential to consider the difference between a life estate and an irrevocable trust. Though each legal tool can be used to accomplish similar goals, there are key advantages and disadvantages to each. Ultimately, which option is best is going to come down to your particular situation. 

At the Law Office of Andrew M. Lamkin, P.C., we understand the importance of protecting your assets for future generations. Principal attorney Andrew M. Lamkin has focused his practice on critical considerations such as this. Contact us today to schedule a consultation.

What Is an Irrevocable Trust?

A trust is a legal vehicle that takes ownership of a person’s assets and manages them on behalf of beneficiaries. The grantor transfers assets into the trust. A trustee then manages those assets on behalf of beneficiaries who benefit from the trust’s assets.

In most cases, the grantor remains in control of the assets in a trust until they no longer can. But an irrevocable trust is a form of trust where the grantor gives up ownership and control of the assets. The critical distinction between irrevocable trusts and other trusts is that once the assets are transferred—the assets in an irrevocable trust are beyond the grantor’s reach. 

The grantor can not change the terms of an irrevocable trust after they establish the trust. Primarily, this distinction is what shields the assets from creditors and the government. This form of trust can also lower estate taxes.

What Is a Life Estate?

A life estate functions much differently than an irrevocable trust. When creating a life estate, the owner gives up their future rights in the estate and transfers them to another party. A life estate makes the property’s original owner a tenant for the remainder of their life. The person who gets the property at the end of the tenancy is called the remainderman. Once the original owner passes away, the remainderman wholly owns the property.

A life estate protects assets from creditors and certain government collections because the original owner no longer owns all the rights to the property. The original owner can not sell, refinance, or make any other significant changes to the property without the permission of the remainderman.

Life Estate vs. Irrevocable Trust: Key Differences

An irrevocable trust is a separate legal entity that takes ownership of your assets and manages them on behalf of beneficiaries. A life estate is simply a deed of ownership that lets you retain partial ownership of a property during your lifetime before passing the property on to another after you pass.

Both tools limit what you can do with your property while protecting them from certain creditors. The key differences arise in the advantages and disadvantages of each legal device.

Advantages of an Irrevocable Trust

Irrevocable trusts have a few advantages over life estates. First, you can use a trust to protect assets beyond real estate. Creating an irrevocable trust protects any asset from creditors and avoids probate proceedings before the assets get transferred to loved ones. Irrevocable trusts also give their creators more control over the assets upon the creation of the trust than a life estate deed does. 

Disadvantages of an Irrevocable Trust

Usually, a trust requires more work to set up than a life estate. The grantor must transfer ownership of assets to the trust, and this can be undesirable for some people. Further, writing the documents that create the trust can be more complicated than creating a life estate deed. Typically, the additional work involved in setting up an irrevocable trust makes them more expensive.

Advantages of a Life Estate

Life estates can be quicker and easier to create than irrevocable trusts. Life estates can also reduce the tax burden on both the original owner and the remaindermen. 

Disadvantages of a Life Estate

In most cases, a life estate can only be used to protect real estate. There can also be tax implications for the remainderman if a property is sold during the original owner’s life. Life estates are also a fairly blunt instrument and don’t allow the level of control that irrevocable trusts do.

Life Estate vs Revocable Trust

The difference between a life estate and a revocable trust is that transferring large assets, such as a home, into a life estate or irrevocable trust can help an individual qualify for Medicaid, depending on state law. Life estates split ownership between the giver and receiver, while an irrevocable trust allows an individual to give away part of an asset.

Which Estate Planning Tool Is Right for You?

Your best estate planning approach will depend upon the particulars of your situation. Sometimes a life estate will work where an irrevocable trust will not and vice versa. There are also other estate planning tools that might work better to accomplish your goals. Additionally, life estates and irrevocable trusts are not necessarily mutually exclusive. Sometimes the best option is to use both tools in coordination. For example, you can place your property in an irrevocable trust while retaining tenancy by creating a life estate. This option can be carefully tailored to your unique circumstances.

Ultimately, an experienced attorney can walk you through your options and help you create an individualized estate plan that best suits your needs.

Andrew M. Lamkin Can Help

At the Law Office of Andrew M. Lamkin, P.C., we know how to protect your assets and set your estate up for success. Our Long Island estate planning lawyer will work with you to get a complete understanding of your situation and develop a comprehensive plan to accomplish your estate planning goals. Contact us today to schedule a consultation.

Author Photo

Andrew Lamkin is principal in the law firm of Andrew M. Lamkin, P.C., where he focuses his practice in the areas of elder law, estate planning and special needs planning, including Wills and Trusts, Medicaid planning, estate administration and residential real estate transactions. He is admitted to practice law in New York and New Jersey.

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