A recent article in USA Today, “Estate planning: Consider a life estate deed,” explains that a life estate is a way to transfer real estate to your beneficiaries during your lifetime. However, it still allows you to keep the right to use and/or live on the property for the rest of your life. This simple process has some tax advantages, and it’s a way to avoid probate on the real estate.
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. 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 must approve the sale. If both parties 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.
However, 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.
Life estates aren’t the best solution for everyone. Talk with an experienced estate planning attorney to determine the best ways to achieve your goals.
Reference: USA Today (February 27, 2017) “Estate planning: Consider a life estate deed”