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Life Estates Explained: What Most People Get Wrong · The Financial Exchange Show

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  Speaker 1: This is Ask Todd on the Financial Exchange Radio network.
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  Speaker 1: Visit Cushingdolan dot com. Now here's Todd Lutsky.
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  Speaker 2: As promised, We're now joined by Todd Lutsky from the
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  Speaker 2: law firm of Cushing and Dolan for Ask TODDA Da
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  Speaker 2: Da Da Da Da Dad. This is your chance to
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  Speaker 2: ask Todd your estate planning questions live on air right now.
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  Speaker 2: ask Todd your estate planning question live on air right
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  Speaker 2: now again eight eight eight two zero five two two
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  Speaker 2: six three. Mister Lutsky, how are you doing today?
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  Speaker 3: I am never better and and and you I'm good.
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  Speaker 3: I take advantage of the warm weather yesterday. Oh yeah,
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  Speaker 3: I got a couple of croissants. Oh yeah, and I
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  Speaker 3: was out in the park and I had an extra,
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  Speaker 3: and so I was feeding it to a couple of pigeons. Yeah.
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  Speaker 2: Turns out that I filled two birds with ones going
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  Speaker 2: Oh yeah, that's good. Yeah, not bad. Todd, want to
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  Speaker 2: talk to you a little bit about life estates. What
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  Speaker 2: is a life estate? Yeah, so it's a great Actually
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  Speaker 2: what does it do? What does it mean?
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  Speaker 3: Yeah, it's It's so important to come back to the
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  Speaker 3: basics and help people understand this because what life estates
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  Speaker 3: are so commonly used and probably more commonly misunderstood. Okay,
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  Speaker 3: so let's start with that one. Normally, a life estate,
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  Speaker 3: just by definition, is you take your property and one
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  Speaker 3: of the ways, one of the most common ways, I
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  Speaker 3: like to call it the wrong way, but it's the
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  Speaker 3: most common way. You take the property and you need
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  Speaker 3: it to your children, and you reserve you keep this
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  Speaker 3: little nugget of ownership called a life estate. It gives
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  Speaker 3: you two primary things. One the right to live there
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  Speaker 3: the rest of your life, which is what you had
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  Speaker 3: before you set it up. But that's good, sure, you
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  Speaker 3: kept that. Two. It gives you the right to income.
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  Speaker 3: So for whatever reason you decide to rent this property,
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  Speaker 3: that rental income would come directly to you. So those
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  Speaker 3: are really the two things. It gives you a little
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  Speaker 3: nuggetive ownership and right to income.
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  Speaker 2: What is the biggest downside in your opinion to using
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  Speaker 2: a life estate as in a state planning tool?
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  Speaker 3: Understand that you use the word biggest downside because there's
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  Speaker 3: so many and I'm glad you mentioned it that way.
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  Speaker 3: There's there's so many downsides to using it. I just
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  Speaker 3: want to throw that out there. But let me think
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  Speaker 3: of one when and again, they're different depending on how
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  Speaker 3: you do them, but mostly the way most people do it,
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  Speaker 3: which is where they give the remainder interest to the
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  Speaker 3: kids and then reserve this right to live there. The
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  Speaker 3: biggest downside of that, I would say, is is you
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  Speaker 3: know your your loss of control, which which by itself
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  Speaker 3: isn't really the answer that. When I say loss of control,
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  Speaker 3: I mean what what have you lost? You've really lost
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  Speaker 3: the ability to sell it and and move. What if
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  Speaker 3: you're you know you did this when you're sixty five,
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  Speaker 3: now you're seventy five, you want to move to Florida.
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  Speaker 3: It's nice and warm and and I want to sell
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  Speaker 3: my house.
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  Speaker 2: Why can't you do that?
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  Speaker 4: Yeah?
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  Speaker 3: Well, who how am I going to sell it?
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  Speaker 1: Well?
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  Speaker 3: I need two signatures now, and maybe more. What if
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  Speaker 3: I have three children and I put three kids' names
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  Speaker 3: on the deed and I reserve the right to live there?
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  Speaker 3: Now I need four signatures and all three kids why
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  Speaker 3: because they own a large portion of the house. I
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  Speaker 3: own a little piece. So I don't know if all
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  Speaker 3: three kids want to sign, and even if they don't,
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  Speaker 3: it's hard for you to force them to. You can't. Well,
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  Speaker 3: I guess you could file a petition to partition the
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  Speaker 3: property and force the sale. But if you did, that
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  Speaker 3: doesn't really help you because where does the majority of
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  Speaker 3: the money go to the kids? And now you don't
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  Speaker 3: have the money that you want to buy your new
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  Speaker 3: house in Florida. Wow, this is like a rabbit hole
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  Speaker 3: that just keeps getting deeper, right, and so now you
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  Speaker 3: got to hope that they give you money back. I
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  Speaker 3: don't like all this permission nonsense, So folks, that's just
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  Speaker 3: just be careful with them.
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  Speaker 2: It would it also be a risk in that if
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  Speaker 2: anything happened that drew legal liability while that money was
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  Speaker 2: in their possession, like that might not even be able
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  Speaker 2: to come back to you even if they wanted to.
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  Speaker 3: Well, I think the one issue is, well, you know
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  Speaker 3: when you when you do that, yes, you are exposing
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  Speaker 3: it to the kid's creditors and now they can't credit.
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  Speaker 2: Like what if there's a divorce that starts while they
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  Speaker 2: have it, that's.
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  Speaker 3: A very big creditor. So yeah, exactly, I think you
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  Speaker 3: you run into the problem of this this property. You know,
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  Speaker 3: they can't move against the life ten and at least,
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  Speaker 3: so that's good. But nevertheless, as you said, Chuck, it's
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  Speaker 3: going to result in having a division in the in
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  Speaker 3: the divorce.
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  Speaker 2: Let's take a quick break here. We still have a
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  Speaker 2: Still a bit of room on the phone lines for
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  Speaker 2: your estate planning questions at eight eight eight to zero
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  Speaker 2: Fred in Framingham. Fred, what is your question for Todd Lusky?
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  Speaker 4: Oh? Hi, thank you. I think this is a common.
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  Speaker 5: Question, or at least many people would have it. Uh,
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  Speaker 5: and I never hear it addressed, Uh, really by anyone.
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  Speaker 1: Okay.
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  Speaker 5: I have a lot of assets in my IRA account huh,
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  Speaker 5: and I'm wondering if there's a tax efficient way to
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  Speaker 5: protect them in terms of medicaid.
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  Speaker 4: Ah.
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  Speaker 3: That's the reason it's not addressed is there's not a
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  Speaker 3: lot to do, right, so, but but I think it's
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  Speaker 3: a it's a great question. It's often asked, and it's
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  Speaker 3: not addressed again because there's not a lot of options.
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  Speaker 3: But there's a few. Well, really, there's one. So let
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  Speaker 3: me tell you first and foremost. We talk a lot
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  Speaker 3: about setting up irrevocable trusts to protect other assets. I
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  Speaker 3: got your FRED, that's not my IRA. Why can't I
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  Speaker 3: just put the IRA into these trusts like I do
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  Speaker 3: with other assets. Well, the big problem is, as we
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  Speaker 3: all might know, that would require us to take the
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  Speaker 3: money out of the IRA and put it into the trust. Well,
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  Speaker 3: if it comes out of the IRA, it's going to
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  Speaker 3: be subject to income tax. So if I got like
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  Speaker 3: a eight hundred thousand dollars eye run, I want to
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  Speaker 3: stick it in my trust. I'm going to get ready
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  Speaker 3: to get ready to lose forty percent of it in taxes.
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  Speaker 3: So what we just won't do that, and we can't
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  Speaker 3: do that, But what we will do is we will
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  Speaker 3: put everything else in the trust. Now here's where the
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  Speaker 3: change has come. Effective twenty twenty two, the Secure Act's
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  Speaker 3: final version came out. The Secure Act governs IRA minimum
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  Speaker 3: distribution rules. Well, it also provides us this opportunity. Let's
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  Speaker 3: say you're married Fred and you have an IRA. If
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  Speaker 3: you're over seventy three, you have to reach at least
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  Speaker 3: seventy three the required beginning date. But even if you haven't,
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  Speaker 3: you can set this up and then just change the
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  Speaker 3: beneficiary on your IRA when you do get to seventy three,
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  Speaker 3: you create this estate plan, you put as many assets
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  Speaker 3: as you can into the ear ofvocable trust. Let those
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  Speaker 3: grow protected right, live off your IRA. What you're going
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  Speaker 3: to be doing anyway, it's outside the trust, so it
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  Speaker 3: comes down over time. But if you happen to die
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  Speaker 3: and never go to the nursing home, if you've named
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  Speaker 3: your s state the beneficiary of your IRA, you can
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  Speaker 3: name your SES state the beneficiary at seventy three. But
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  Speaker 3: if you're going to do that, when you're doing your
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  Speaker 3: estate plan, you must have a testamentary trust fancy word
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  Speaker 3: for a will built into the trust. Right, I'm sorry,
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  Speaker 3: a trust built into the will. And so you build
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  Speaker 3: your trust inside your will, name the estate the beneficiary.
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  Speaker 3: And then when you die, if you're seventy three or
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  Speaker 3: over and have never gone to a nursing home, which
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  Speaker 3: again we all kind of want that. So you're giving
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  Speaker 3: yourself at least a fifty percent chance of saving this asset.
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  Speaker 3: But you have a spouse. Instead of naming the spouse,
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  Speaker 3: the money goes through probate. Yeah, I get it, one
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  Speaker 3: bad thing, but it's only one asset. Now it's stuck
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  Speaker 3: in this testamentary trust for the benefit of your wife.
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  Speaker 3: It'll be sheltered for state taxes. It'll be completely available
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  Speaker 3: to your wife both income and principle. There's no adverse
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  Speaker 3: income tax consequence to it, and if your wife gets
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  Speaker 3: sick the next day, no five year waiting period, it's
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  Speaker 3: immediately protected from the nursing home. Definitely worth exploring that option.
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  Speaker 3: It's the only way to at least give yourself a
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  Speaker 3: shot at protecting an IRA from the cost of long
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  Speaker 3: term care. Folks, I know that was a little complicated,
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  Speaker 3: but I want to spend a minute talking to you
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  Speaker 3: about our life estate situation. Like Chuck was talking about earlier. Again,
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  Speaker 3: so many people have these, so many people misunderstand them.
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  Speaker 3: If you don't have if you have one, you should
• 10:27
  Speaker 3: get the guide to learn what you have. If you
• 10:29
  Speaker 3: don't have one, get it before you get one, And
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  Speaker 3: if you have one, you might figure out a way
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  Speaker 3: to get out of it. This guide gives you the
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  Speaker 3: three times that I would do a life estate. It
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  Speaker 3: gives you all the gift tax income tax consequences associated
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  Speaker 3: with them, the selling of the property, the buying of
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  Speaker 3: another property once you have a life estate. It explains
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  Speaker 3: the creditor issues. It explains the few benefits that exist
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  Speaker 3: as well. I don't want to say there are no
• 10:56
  Speaker 3: benefits to life estates there are get it eight six
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  Speaker 3: six eight four eight five six nine nine or Legal
• 11:05
  Speaker 3: Exchange show dot com again eight six six eight four
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  Speaker 3: eight five six nine nine or Legal Exchange Show dot com.
• 11:12
  Speaker 3: And always go to our Instagram page Cushing Dolan PC
• 11:16
  Speaker 3: for lots more information, Tod, I got another.
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  Speaker 2: One here for you. Let's go to Carl in Plainville. Carl,
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  Speaker 2: what is your question for Todd?
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  Speaker 4: Hey, thanks for taking my call. Sure, just get a
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  Speaker 4: quick question me and my sister. My mother's house is
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  Speaker 4: an irvocable trust in Ingham. Okay, it needs a lot
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  Speaker 4: of work, so she she having a slightcase of dementia.
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  Speaker 4: So can the house be sold by another house? Or
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  Speaker 4: as soon as you sell the house is it does
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  Speaker 4: that become unprotected?
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  Speaker 3: Yeah? No, great question. The answer is I haven't read
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  Speaker 3: your trust, so I don't know all the answers, but
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  Speaker 3: I will answer it based on the way we drafted
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  Speaker 3: at Cushing and Dolan. Okay, so we drafted as a
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  Speaker 3: grand tour trust. You can absolutely sell the house, so
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  Speaker 3: out would go the house to the buyer. In would
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  Speaker 3: come all the money into a bank account in the
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  Speaker 3: name of the trust, follow me, and so that does
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  Speaker 3: not reset the five year waiting period. Now you have
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  Speaker 3: money in the trust because it's a grant toward trust.
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  Speaker 3: If it was your mom's primary residence, then your mom
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  Speaker 3: would still be entitled to that capital gains exclusion of
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  Speaker 3: two point fifty if she's single. If your mom and
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  Speaker 3: dad are both alive, and then you get a five
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  Speaker 3: hundred thousand dollars capital gains exclusion, So selling it no
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  Speaker 3: adverse income tax consequence. It does not reset the five
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  Speaker 3: year waiting period. And now there, of course, you know
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  Speaker 3: you're obviously homeless, you have no house. So what am
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  Speaker 3: I doing. We're going to buy another house. Out goes
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  Speaker 3: the money, incomes a new house into the trust. So
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  Speaker 3: you see, all we did was convert what was already
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  Speaker 3: in there from one item to another, and by doing that,
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  Speaker 3: you never reset the clock. And now your parents have
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  Speaker 3: a new house. In fact, they could move and live
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  Speaker 3: in any state they want to and still do it
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  Speaker 3: within this ire irrevocable trust. So hopefully that was helpful.
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  Speaker 2: Todd, we were talking about life estates earlier in some
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  Speaker 2: of the UH kind of the problems with them. What
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  Speaker 2: are the redeeming characteristics of life estates? Are there things
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  Speaker 2: that you know could make them have a place in
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  Speaker 2: a comprehensive estate plan.
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  Speaker 3: Yes, there can be. So so you know, is there
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  Speaker 3: a redeeming quality? Well, yeah, you have the right to
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  Speaker 3: live there. It It arguably will protect the house from
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  Speaker 3: the nursing home after five years, even though there's a
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  Speaker 3: lot of control issues that you've lost with that. It
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  Speaker 3: will provide that, and it will get you a step
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  Speaker 3: up in basis when you die. So it you know,
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  Speaker 3: when you die, you even though you think you've given
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  Speaker 3: away the house, it's still includable in your in your
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  Speaker 3: estate for a state tax purposes, and so you get
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  Speaker 3: a full step up in basis and eliminate the built
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  Speaker 3: in gain for the beneficiary. So that's you know, that's
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  Speaker 3: that's helpful. And so I think all of those things
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  Speaker 3: are are helpful. But you know I and I guess
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  Speaker 3: when would I do it? You know, while those things
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  Speaker 3: are helpful, I think the negatives would still offset doing
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  Speaker 3: it unless I either put it into an irrevocable trust
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  Speaker 3: and retain the right to live there.
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  Speaker 2: But what's the case for doing both? The era of
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  Speaker 2: trust plus the life estate.
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  Speaker 3: Well, because I don't want to give my house to
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  Speaker 3: my kids. That's really the issue, right if I have to,
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  Speaker 3: if I have to take the house and give it
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  Speaker 3: to the kids, versus take the house and put it
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  Speaker 3: in an irrevocable medicaid trust and retain the right to
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  Speaker 3: live there, huge difference. I keep a lot more control
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  Speaker 3: over it. So that's an essence, you know why I
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  Speaker 3: would do it that way. And even to this last caller, right,
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  Speaker 3: even if you had the life estate and the remainder
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  Speaker 3: interest was in the trust, this caller that you could
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  Speaker 3: still do this. You could still sell the house, just
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  Speaker 3: like we told the they should do, a large portion
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  Speaker 3: of the money would go into the trust, not to
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  Speaker 3: the kids, and Mom would get a little piece, and
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  Speaker 3: you could buy another house, you know, with the money
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  Speaker 3: that's in the trust. The only downside again, another downside
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  Speaker 3: is Mom would have got a little nugget of ownership, right,
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  Speaker 3: so she would have got a piece of the proceeds
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  Speaker 3: in her hands, the piece of the proceeds that come
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  Speaker 3: to you. Re expose that to the nursing home.
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  Speaker 2: Mister Lutsky, appreciate you joining us as always always a pleasure.
• 15:29
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