There are pros and cons to the use of a life estate deed when it comes to the family home.
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. 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 elder law attorney can help plan the sale properly, so the proceeds may not need to be spent down on the cost of care.
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 elder law 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.
Reference: USA Today (February 27, 2017) “Estate planning: Consider a life estate deed”