How a Life Estate in Iowa Could Cost You the Farm

Orange City Iowa Estate Planning

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As part of preparing for the future, some estate planning attorneys recommend that property owners create a life estate that allows their children to take over the interest in the property in the future. This avoids having the property pass through probate. Unfortunately, however, this arrangement often causes far more problems than it solves and requires costly corrective measures to prevent severe losses.

Before taking this step, you need to understand what it does and how it can work against you. And you need to know about alternatives that could provide many of the same benefits without the risks.

What is a Life Estate?

A life estate is an interest in property that only lasts as long as the life of the person who holds that interest. It is a form of joint ownership. The other owner of the property is the person who receives the remainder that is left when the person with the life estate passes away.

Most of the time, a life estate is created for real estate. Both the person with the life estate and the person holding the remainder own something of value, but it can be very tricky to determine what that  value is because it depends on what happens during the lifetime of the life estate holder.

While the life tenant is alive, they can use the property and they are expected to maintain it. They do not have the right to sell it unless the holder of the remainder agrees (because that person owns an interest in the property, too.). So, essentially, if you create a life estate for yourself, you are giving away your property but keeping the right to use it for the rest of your life.

Interference with Medicaid Eligibility

Since the creation of a life estate is essentially a gift, it is treated as a gift under the rules of Medicaid eligibility. If you are trying to lower your countable assets to qualify for Medicaid long-term care benefits, then if you create the life estate within five years of the time you apply, that will be counted against you.

Then, even if the five year lookback has passed, the life estate portion still counts as an available asset for your Medicaid eligibility. That means you could end up having to sell the farm—or whatever property is involved—to pay for long-term care costs while waiting to establish eligibility. The life estate can be subject to estate recovery as well.

Learn About the Best Options for Your Situation

If you are considering or already have a life estate in place, it is a good idea to talk to an elder law and estate planning attorney – specifically someone with experience handling a variety of elder law and related issues. A life estate might make sense in your particular case, or it could set you up for substantial losses in the future.

At Huizenga Law Firm, P.C., we take the time to understand all the unique factors that could impact your future needs. We also understand the effect that a multitude of federal and Iowa laws can have on your financial situation during your lifetime and beyond. Let us help you find the right plan to protect the farm for yourself and future generations.

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