As you consider how to protect your assets and provide for loved ones, you face important decisions about the legal tools that will best serve your needs.
New York law allows you to pass property through a life estate or irrevocable trust. Both options offer ways to transfer property ownership and protect assets from creditors and government claims. However, understanding the key differences between these estate planning instruments can save you and your beneficiaries significant headaches down the road. An irrevocable trust provides advantages that a life estate simply cannot match.
Here, the estate planning attorneys at Landskind & Ricaforte Law, P.C. explain why you might benefit from creating an irrevocable trust and how it could fit into your Brooklyn estate plan.
First, What You Need to Know About Life Estates in New York City
A life estate is a type of legal arrangement in which interest in real property is divided between two separate parties: the life tenant and the remainderman, who receives ownership of the property after the life tenant dies.
After establishing a life estate, the life tenant will retain the right to use and access the property for the remainder of their lifetime. Upon their death, the life tenant’s interest will transfer to the remainderman, who may take control of the property without going to probate.
Property interests can be distributed among more than one remainderman in a life estate. These remaindermen will almost always be named in advance.
Life estates are sometimes considered a simple alternative to living trusts. In New York, forming a life estate is typically a straightforward process that, under most circumstances, includes doing the following:
- Talking through your options with our legal life estate planning lawyers
- Deciding which properties you want to include in your life estate
- Determining who you would like to name as your remainderman or remaindermen
- Drafting a life estate deed that contains a detailed description of the property, your name and the name of your remaindermen, and the terms of transfer
- Notarizing the document and submitting a copy to your county recorder’s office
Once your life estate has been drafted and executed, the life tenant and the remainderman will be entitled to certain rights.
However, life estates do not offer the same benefits as irrevocable trusts.
Understanding the Drawbacks of a Life Estate
When you consider deeding your property to a life estate, you should understand that you cannot make any changes once the document is executed. Since a life estate is difficult to reverse or overturn, you must understand how it works and be confident that it is right for you. Additionally, you need to be aware of other drawbacks and potential complications:
- If you want to sell the home. If you’ve deeded your home to a life estate, you may face issues if you want to sell it. All parties on the deed must sign the purchase agreement and all closing documents. This includes the remainderman. If the remainderman doesn’t want the home to be sold or they’re unavailable for document signing, this can create challenges.
- If something happens to your remainderman. It’s possible that at some point, your remainderman may die. If this happens, your life estate may have to go through probate. Or, it’s possible that your remainderman could get sued. If so, their portion of the property could be subject to a lawsuit.
- If you want a mortgage. If you have a mortgage on the home or want to get one, banks and lenders may take issue with a remainderman being on the deed.
- If you have problems with the title. Typically, a home transfer is between family members. Thus, life estate deeds don’t usually include a full investigation of the home’s title. There could be title defects or judgments against the life tenant or the remainderman, which could create unexpected challenges.
Why We Recommend Using an Irrevocable Trust
When deeding your property for estate planning purposes, we usually recommend using an irrevocable trust rather than a life estate. Irrevocable trusts have several significant advantages, including the following:
Asset Protection Beyond Real Property
An irrevocable trust provides comprehensive protection for various types of assets beyond just real estate. While life estates only protect real property, irrevocable trusts can safeguard:
- Financial accounts, including checking, savings, investment, and retirement accounts
- Personal property such as vehicles, artwork, jewelry, and collectibles
- Business interests, including ownership stakes, stocks, and intellectual property
- Digital assets like cryptocurrency, online accounts, and income-generating websites
- Life insurance policies, which can be owned by the trust rather than individually
This broader protection strategy allows you to create a more comprehensive estate plan that addresses all your valuable assets rather than focusing solely on real estate.
Protection From Probate and Creditors
Assets placed in an irrevocable trust bypass the probate process entirely, offering several critical advantages, such as:
- Privacy since trust documents are private, unlike probate records
- Cost savings since you avoid probate fees and court costs
- Efficiency because you can avoid probate delays
- Creditor protection since assets properly transferred to an irrevocable trust are generally shielded from personal creditors
- Protection from potential lawsuits, as the assets no longer legally belong to you personally
This protection begins when assets are transferred into the trust, not just after your death.
Greater Control Over Asset Distribution
Irrevocable trusts offer significantly more control over how and when your assets transfer to beneficiaries because:
- Specific conditions can be established for distributions, such as reaching certain ages or milestones
- Structured distributions can protect beneficiaries from receiving large sums all at once
- Special provisions can be included for beneficiaries with special needs without jeopardizing government benefits
- Professional trustees can manage assets for beneficiaries who may lack financial experience
- Specific instructions can direct how funds should be used (education, health care, housing, etc.)
This level of control allows you to extend your wishes well beyond your lifetime, ensuring that your assets support your loved ones exactly as you intend. A well-structured trust can provide guidance and support for generations, while a life estate simply transfers ownership with no ongoing direction.
Medicaid Eligibility
At some point, you may need Medicaid to pay for long-term care in a nursing home or an assisted living facility. To be eligible for these benefits, you may have to “spend down” your assets to meet Medicaid’s strict financial requirements to ensure you qualify.
You can transfer your home into an irrevocable trust to help you spend down and qualify for Medicaid benefits. When you make this transfer, the trust becomes the legal owner of your home. However, you’re still allowed to live in it for the rest of your life. After your death, the property transfers automatically to the trust without going through probate.