By Jason Stern
Probate vs Life Estate: Why Probate is still the better choice for most
Many law firms create a quiet skepticism about the probate process by holding seminars to sell prospective clients on the estate tool known as the life estate. The life estate is a limited interest in real property. Normally a life estate allows a grantor to place a fixed asset such as a house in a trust that passes to their beneficiary at the time of their death. A life estate ordinarily permits the grantor to remain in the house for the rest of their life while avoiding any and all estate tax liability.
It is becoming very easy to scare clients into paying large attorney’s fees to create these types of life estates with horror stories of probate proceedings that have gone bad. However, the probate process is nothing to be afraid of if planned properly.
In fact, under the current estate tax code, the probate of a will has never been more advantageous than it is today. With a little help and guidance from the best probate attorneys in New York the probate of a will is still the best way to transfer wealth for most individuals.
The probate process should start with the creation of an attorney drafted and witnessed will. After the will is properly created the original should be kept in a safe place where it would be readily available if needed. Upon the person’s death, an experienced New York probate attorney should admit the will to probate.
Why is the probate process better ?
In the past one of the main reasons for creating the life estate was to remove estate assets from an estate to avoid the dreaded Federal Estate Tax. However under the current Estate Tax Code married couples are jointly exempt from Federal Estate Tax liability for any and all assets up to $10,000,000.00 (TEN MILLION). Most people no longer have to create expensive, exotic schemes to avoid the Federal Estate Tax and can probate up to ten million dollars in assets without any Federal Estate Tax liability.
For anyone owning stock in a co-op the probate process is still your best estate tool as well. Co-operative apartments (Co-ops) are shares in a real estate corporation and cannot ordinarily be placed in a life estate because most Co-ops have restrictions on such transfers.
The life estate was also looked at as a useful way to get around the Medicaid 5 year look back period as it is often referred to. However, Medicaid is becoming increasingly aggressive in finding value within a life estate that may become subject to Medicaid reimbursement.
The life estate was also used to disinherit spouses from their husband or wives’ estates. However all of that changed when the legislature rewrote the law to include assets in life estates as estate property for purposes of the spousal right of election. As such, in New York State assets within a life estate are now subject to spousal inheritance.
In our current economic environment another major flaw of the life estate is becoming more apparent. When someone creates a life estate they are transforming their interest in a piece of property into a “vested interest” for a beneficiary. This can go horribly wrong in cases where a parent puts their home in a life estate naming their child as the remainder interest. Should that child ever file for bankruptcy, their creditors can auction off their vested interest in the property creating an estate nightmare.
Another great advantage of the probate process is the capital gains tax exemption known as the “stepped up basis”. When a beneficiary receives an asset through an estate there is a capital gains exclusion known as the “stepped up basis”. As such, when the estate asset is sold the purchase price for capital gains purposes is calculated on the property value on the date of death. For example, if someone had a house worth $1,000,000.00 at the time of their death and they purchased it 40 years ago for $35,000.00 the beneficiary can now sell the house as if they purchased the house at the $1,000,000.00 price rather than $35,000.00. This is very good because now the beneficiary avoids the dreaded capital gains tax. Try and imagine the tax liability on the house with $965,000.00 of appreciation. Property value in a life estate is calculated from the date the property was placed in the life estate. This can leave the remainder interests of the life estate with a considerable tax burden if there is asset appreciation from the date the life estate was created.
Through the years, the probate process has and currently is the simplest and best estate tool available for most people. Unless you are facing an imminent Medicaid catastrophe, the probate process is still a great way to distribute wealth. With the help of the right New York probate attorney a will is a fast and economical way to get your affairs in order.