When designing estate plans for farmers, they often ask me if a life estate will work to transfer farmland to their children.

My usual answer: “It depends.”

A life estate is created when an owner transfers real estate to another person and keeps the right to use and/or occupy the real estate during his or her lifetime.

Advantages of a life estate:

• The real estate is distributed to the remainderman without probate.

• The life tenant maintains full control and use of the real estate while alive.

• The remainderman receives the real estate with a stepped-up basis.

• The real estate is not usually considered an available asset when applying for medical assistance until it is sold.

These advantages make the life estate attractive to many farmers. However, I then ask if they are willing to accept the following disadvantages as well:

• You cannot change your mind and take the real estate back.

• You cannot instruct how the real estate will be rented or sold upon your incapacity or death.

• You cannot sell the real estate without the remainderman agreeing.

• If the real estate is sold, you will not receive all the proceeds. The remainderman will receive a percentage of the proceeds.

• The real estate is included in your taxable estate for estate tax calculations.

• The real estate is not protected from litigation, divorce or bankruptcy.

The real estate is not fully protected if you receive medical assistance or long-term care benefits.  There are a few disadvantages that are part of this circumstance:

• If the property is sold while you are alive, your share of the proceeds must go toward the payment of your long-term care costs.

• If the life estate was created after August 1, 2003, and a medical assistance lien is placed against the real estate, this lien will stay in place after your death. The lien amount will equal the amount of your long-term care benefits up to the value of the life estate on the date of your death. The life estate value is calculated according to the DHS Life Estate Mortality Table.

•* The transfer of the real estate is considered an uncompensated transfer and is subject to the five year look back if applying for medical assistance.

It is my recommendation you compare the advantages and disadvantages of the life estate with other options for transferring and protecting the real estate, such as trusts and business entities, to help decide what plan works best.

Balzarini is an attorney at law for Miller Legal Strategic Planning Centers, P.A., Rochester, Minn. Contact him at [email protected].