"Do it Yourself" Estate Plan Backfires

In The Medicaid Trap, Est. Analyst (Nov. 2007), Robert L. Moshman tells a story about an unfortunate mother who did not hire her own estate planning attorney and ended up in a financially detrimental situation.

Here are some excerpts from this article:

Mom, a widow, age 72, with a net worth of $500,000 owns a home worth $400,000. She has four children.

Five years ago Daughter and Son-in-Law lost their home and declared bankruptcy and ended up moving in with Mom.***

Then, one day, Daughter and Son-in-Law informed Mom that they want to buy her house[.]*** They tell her that by selling assets now, she'll qualify for Medicaid in the future. And they'll provide her with a life estate...***

Son-in-Law priced the house at $300,000, had Mom provide a "gift of equity" worth $150,000, got a mortgage for the remaining $150,000 which he had Mom sign over in return for the life estate.***

Without offering up one dime of his own money, Son-In-Law ended up with a house worth $400,000 and $150,000 cash. Meanwhile, Mom was left with a life estate. But from that day on, Mom was excluded from the household, subjected to verbal abuse, and ended up staying in her room, which was crammed with possessions that Son-In-Law threatened to throw out. The tension landed Mom in the hospital.

Analysis: What's wrong with this picture? Everything. Without her own attorney, Mom never understood what a "gift of equity" meant or where her $150,000 went. Nor did anyone take the time to explain the impact of this transaction on her estate plan. Instead of providing benefits worth $125,000 to each of her four children, this transaction left her with $100,000 to be divided equally under her existing will even though one of her children had already seized 80% of her net worth.***