Avoiding Probate with the  Enhanced Life Estate Deed

Virtually all of my clients want to know how to pass their assets to their children without the expense (legal fees) or delays that they think will be involved in probate. This article is not intended to discuss the probate process, but to get started I must mention certain principles:

If you own property in your own name when you die, your beneficiaries will have to hire a lawyer to probate your estate. However, certain assets will pass under the terms of the contract between you and, for example, your bank, where you have named a beneficiary on your account. This also works for insurance policies, annuities, and IRA accounts.

Similarly, for real estate, if you own your condominium in your own name when you die, your family will have to go to court to clear the title so that they can sell the property. However, there are exceptions:

1. Husband and Wife. When a husband and wife own the apartment jointly (known as an estate by the entireties), the survivor will automatically own the property upon the death of the other. You will need to see an attorney, but the legal services involved are minor compared to probate.

2. Transfer to Revocable Living Trust. Your personal residence is secure in Florida and cannot be taken from you even if you have judgments against you. However, in 2001, a Bankruptcy Court case concluded that if you transfer your homestead into a revocable trust, it no longer is exempt from creditors’ claims. Since then, prudent estate planning attorneys resist transferring homesteads into revocable living trusts. This homestead protection has nothing to do with the Florida Homestead Tax Exemption. The tax exemption is still available to personal residences in trust, provided that the trust specifically states that you can live in the property.

3. Jointly with Child (or Children). If you transfer title to a child and hold title as joint tenants with right of survivorship with the child, there will be no probate when you die (or the survivor of a husband and wife dies). Here also the child should see an attorney, but the legal services are minor compared to probate. On the other hand, there are potential problems that should make you think twice before putting the title in joint names with your child.

a. This may be prohibited or restricted under the condominium documents, or may require association approval.

b. If you have a mortgage, you will need lender approval. If they permit it, they will charge a fee.

c. The transfer may result in the partial loss of your homestead tax exemption.

d. If your child has any income tax liens or judgment liens against the child’s share, they must be cleared before the property could be sold.

e. You could no longer sell or mortgage your property without your child’s consent.

f. You may be required to file a gift tax return.

g. The value of the interest transferred will be considered a gift for Medicaid purposes and will be the basis for a “waiting period” that could delay your access to Medicaid benefits to pay for skilled nursing home care.

4. Traditional Life Estate Deed. Alternatively, you could do a traditional Life Estate Deed under which you retain the right to possession and enjoyment for your lifetime, and upon your death (or the death of the surviving spouse), the remainder (what is left after your life estate terminates) will pass to the child (here known as the “remainderman”) when you die. Although you may not have all of the problems mentioned under item 3, you will at least be faced with items e, f, g and h.

5. Enhanced Life Estate Deed. With an Enhanced Life Estate Deed, you could transfer the remainder to your child or to a revocable living trust that would permit greater control of the property after your death.  The Enhanced Life Estate Deed is a specially designed instrument that is only available in a few states, including Florida. It is similar to a traditional Life Estate Deed, and there is no capital gains tax if the property is sold shortly after your death. However, you retain the right to change your mind. That’s right. Without your child’s consent, you can take the property back and give it to someone else. In addition, you have the right to sell or mortgage the property and keep all of the proceeds without your child’s consent. To underscore the difference between the Traditional and Enhanced Life Estate Deed, with an Enhanced Life Estate Deed,

a. The condominium association approval should NOT be required.

b. You should NOT need mortgage company approval.

c. The transfer should NOT affect your homestead tax exemption.

d. You should be able to sell or mortgage your property without your child’s consent (although some title companies may ask for your child to sign).

e. You will NOT be required to file a gift tax return since IRS considers the transfer an incomplete gift.

f. The value of the interest transferred will NOT be considered as a completed gift for Medicaid purposes and will NOT be the basis for a “waiting period” that could delay your access to Medicaid benefits to pay for skilled nursing home care.

g. However, if your child has any income tax liens or judgment liens, they may have to be paid off before the property can be sold. There are differences of opinion on this point. Until there are court decisions resolving these issues, we assume that the liens will have to be cleared. Many attorneys take the position that if you can sell your property without the signature of your child (the remainderman), then why should you have to pay off the remainderman’s lien in order to sell your property?

In conclusion, the Enhanced Life Estate Deed is an incredible tool for avoiding probate with minimal downside when compared to the alternatives

For additional information or to schedule an appointment, call Boynton Beach, Florida Elder Law & Estate Planning Attorney Martin H. Cohen at 561-880-8223.