Risks and Considerations: Deed with Life Use vs. Asset Protection Trust for Estate Planning

When it comes to estate planning, both a Deed with Life Use (Life Estate Deed) and an Asset Protection Trust are legal tools used to manage the transfer of property and assets. While each option has its advantages, it’s essential to be aware of the potential dangers associated with both to make informed decisions that align with your specific needs and goals.

Dangers of a Deed with Life Use (Life Estate Deed):

  1. Loss of Control: With a Life Estate Deed, the property owner (grantor) retains the right to use and occupy the property during their lifetime. However, once the property is transferred to the designated beneficiary (remainderman), the grantor loses full control over the property. The remainderman has a vested interest and must agree to any future property-related decisions, which can lead to conflicts or disagreements.
  2. Medicaid Eligibility Concerns: Transferring property through a Life Estate Deed can impact Medicaid eligibility. If the grantor requires long-term care within five years of transferring the property, it may be subject to Medicaid’s look-back period, potentially affecting eligibility for Medicaid benefits.
  3. Tax Implications: While a Life Estate Deed can provide some tax advantages, it can also result in a step-up in cost basis upon the grantor’s passing, potentially leading to higher capital gains taxes for the remainderman when they sell the property.
  4. Risk of Inheritance Issues: If the designated remainderman passes away before the grantor, the property may pass to the remainderman’s heirs, potentially bypassing the grantor’s intended beneficiaries.

Dangers of an Asset Protection Trust:

  1. Complexity and Cost: Establishing and maintaining an Asset Protection Trust can be more complex and costly than other estate planning options. Professional legal assistance is often required to set up and manage the trust properly.
  2. Irrevocability: In most cases, an Asset Protection Trust is irrevocable, meaning the grantor cannot make changes or reclaim assets placed in the trust. This lack of flexibility can be problematic if circumstances change or if the grantor later wishes to modify the trust.
  3. Potential Challenges: Asset Protection Trusts may face challenges from creditors or legal entities seeking access to the trust’s assets. Improperly structured trusts may be vulnerable to legal challenges.
  4. Loss of Direct Control: Like the Life Estate Deed, an Asset Protection Trust involves ceding direct control of assets to a trustee. The grantor must trust the trustee to manage the assets and adhere to the trust’s terms faithfully.

The appropriateness of a Deed with Life Use or an Asset Protection Trust depends on an individual’s unique circumstances, estate planning goals, and the desire to protect assets and ensure a smooth transfer of wealth to beneficiaries. Eastham Law Offices can help you understand the complexities and risks involved. Call our office at 561-395-6800 or fill out our contact form to schedule a meeting and we will be in touch to get that scheduled.