Life estate deeds can be used to transfer real property to heirs and maintain the right to use or live on the property, as long as you are alive. This is a popular way to avoid probate on the real estate, and there are some tax advantages, according to an article in USA Today, “Estate planning: Consider a life estate deed.” There are some considerations, however, that need to be explored before going forward.
The life tenant has the exclusive right to use the property during his or her lifetime. In many cases, this is a joint life tenant, like a husband and wife. The life tenant must maintain the property and pay the taxes and insurance. The remainderman has the exclusive ownership rights and responsibilities after the life tenant(s) die. At that point, the full ownership automatically transfers to the remainderman—without any probate or court filings, but some documents will need to be recorded. At this point, there’s what’s known as a full step up in basis, which provides capital gain tax advantages to the remainderman.
If a property is sold when there is a life tenant, both the life tenant and the remainderman may need to approve the sale. If both parties need to agree to the sale, then the life tenant will get a percentage of the sale proceeds (based on the life tenant’s age) and the remainderman will receive a percentage of the proceeds.
It is important to note that there may be an issue for the life tenant if he or she is receiving or planning to qualify for Medicaid benefits. An estate planning attorney can help plan the sale properly, so the proceeds may not need to be spent down on the cost of care.
Life estates were used in the past as a way to protect real estate from potential long-term care costs and to keep control over the real estate during one’s lifetime. After five years lapsed from the transfer date, prior to applying for Medicaid, the property was protected from the cost of care. When applying for Medicaid for long-term care costs, the state usually wouldn’t calculate a life estate as an available asset.
Some states have passed laws providing that all life estates created on or after a certain date are thereafter subject to estate recovery. This means that upon the death of a person receiving Medicaid benefits, the state could recover a percentage of the value of the life estate property, with the percentage determined by the age of the Medicaid recipient at the time of death. In these states, a life estate deed wouldn’t be the best way to preserve real estate from the cost of potential long-term care.
In other words, life estates are appropriate for some families and a mistake for others. To learn if this could be a useful tool for your family, speak with an estate planning attorney who can show you the reasons why this might be a good fit and why it might create problems. You’ll know to know both sides of the story before deciding to use this estate planning tool.
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Reference: USA Today (February 27, 2017) “Estate planning: Consider a life estate deed”