Q: I s there a safe way to do a ‘life estate’ for a sibling? Let’s say Mary, who is single and childless, owns her own house in New York State. Her divorced sister Sally lives with her. Mary wants her sister Sally to inherit her house. Mary also wants to make sure that she won’t be kicked out of her own house during her lifetime, by Sally or anyone else -- like Sally’s future husband if she remarries.
Can Mary arrange things so that only her sister can inherit the house and no one else – like a husband or step-children if Sally remarries -- can have any legal claim on it? How can she avoid probate or any other problems or expenses with Sally inheriting the house? When Mary gets older, she may need to apply for Medicaid assistance for nursing home care. How can she make sure Medicaid cannot lay claim to the house?
Can Mary also make sure that her sister inherits whatever car she owns when she dies? Is there a way to avoid probate and extra expenses on that? Is there a ‘life estate’ for cars? – RE via email
A: Tell Mary to stop worrying about how to avoid probate!
The simplest way to make sure her sister inherits the house when she dies, but at the same time avoid giving her sister any control of the house during her lifetime, is for Mary to leave it to Sally in her will.
When Mary dies, her will goes through probate: Her executor presents the will to Surrogate’s Court. The court confirms that it’s a valid will and authorizes the executor to follow its instructions. And Sally gets the house (and the car). End of story.
As I’ve written many times, in New York this procedure is both quick and inexpensive. In most cases, it takes one to three weeks. New York’s probate fees range from as little as $45 to a maximum of $1,250. The maximum is charged on estates worth $500,000 or more. As for the legal fees, it’s a very simple matter to prepare and file probate documents. In the New York metropolitan area, the legal bill ranges from about $1,000 to $2,500.
A trust that avoids probate is going to cost more than probate! (And if Mary's estate incurs any administrative or tax filing expenses, they'll cost the same with a trust as they do with a will.)
Okay, so what are the alternatives to a will?
One is to die intestate -- i.e., without a will. You say Mary is unmarried and childless. If her parents are deceased and Sally is her only sibling, if Mary dies intestate then by law Sally will automatically inherit everything she owns. There's no will, so there's no probate.
Or Mary could transfer the house into a recovable trust, making herself the trustee. As the trustee, Mary controls the house during her lifetime. As the trust beneficiary, Sally inherits the house. Trust assets don't go through probate.
Another option is to make Sally a joint owner of the house with survivorship rights. Jointly-owned property doesn’t go through probate; it automatically goes to the surviving joint owner. The downside: Sally owns half the house. She has the legal right to sell or mortgage her half during Mary’s lifetime -- although in practical terms, that wouldn’t be easy. Sally could also lose her share of the house in a lawsuit or a future divorce . The worst case scenario: Sally's creditors could force a sale to recoup their money from her half of the proceeds.
Alternatively, Mary could use the strategy you’re talking about, which is called a transfer with retained life estate: Mary transfers the house to Sally, but keeps a life estate for herself. When Mary dies, the house avoids probate and goes automatically to Sally. During Mary's lifetime, Sally would have the legal right to sell the house -- but because Mary has a life estate, she couldn’t be forced to move out. Any sale would be subject to her right to continue living there. If Mary herself decided to sell the house, she’d have to share the proceeds with Sally.
I have never heard of transferring a car with retained life estate. It doesn't make financial sense to give away the future right to an asset that's going to expire before you do. And if you don't yet own the car, I don't see how you can transfer a future right to it.
What about Medicaid? It's true that under current New York law, Medicaid cannot claim assets that bypass probate. But that could soon change.
It's unclear from your question whether Mary wants to make sure that even after her own death, no future husband or stepchildren of Sally's will ever have any legal claim on the house. But if so, it's beyond the scope of this column, and requires consultation with an estate lawyer.
Please send your questions to Lynn@LynnBrennersFamilyFinance.com. I'm sorry I can't respond personally to every email. Questions are only addressed online.
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