Life Estates

For most people, their home is their largest asset.  It is also the one asset people are most sentimental about and the one they wish to protect the most.  One of the ways this can be done is by use of a life estate. 

A life estate is a type of interest in property whereby the holder of the life estate is entitled to use and/or occupy property owned by another.  An owner can give a life estate to another or the owner can retain a life estate in property that is transferred to another.  Both parties have an interest in the property. 

Although other assets can be transferred with a life estate, it is principally used for real property.  This article reviews a typical situation where the owner of real property wishes to transfer it but retain an interest to use and occupy it for the rest of his life.  This is frequently done when parents want to transfer their home to their children yet be assured that they can continue living there for the rest of their lives. 

The owner of the property transfers the property by a deed in which it is stated that he retains a life estate interest to use and occupy the property for the rest of his life.  The transferor, or donor, is then called the life tenant. The donee, who would obtain the property upon the death of the life tenant, is called the remainderman.  It is important to note that each has an interest in the property and once this interest is created it cannot be changed without the consent of both parties.

Transferring property with a life estate has many advantages, but is not for everyone and consideration must be given to other alternatives, the circumstances and intentions of the owners and those they wish to transfer to, and the consequences of such a transfer.  There may be some disadvantages.  Note also that a sale or mortgage of property is further complicated by the fact that all owners would be required to join in the mortgage or sale.  For example, if the life tenant wanted to take out a home equity loan, the lender would require that the remainermen also be liable on the mortgage.  In the event of a sale, both the life tenant and the remaindermen would be entitled to a portion of the proceeds of the sale.

Whenever one transfers property for less than fair market value, the value of the property transferred above what was paid by the receiver of the property is considered a gift.  Since the value of any interest real property transferred is undoubtedly above the annual gift tax exclusion amount (currently $12,000), the transferor must file a gift tax return even if no gift tax is owed. Careful consideration must be given to the gift and estate tax consequences of making this transfer and one should seek the advice of an attorney before doing so. 

One of the most significant advantages to transferring property while retaining a life estate is that if the property is not sold until after the death of the life tenant, the remainderman will receive the same step-up in basis of the asset as if they inherited it at the death of the owner, thereby reducing or eliminating any capital gains on the sale.  However, if it is sold prior to the death of the life tenant, each owner would be entitled to a share of the proceeds.  The life tenant would be able to offset his/her gain by using the $250,000 exclusion, but the remainderman may not be able to do so.  He/she would be liable for the capital gains taxes computed on the transferor’s basis in the property.  This is important to keep in mind if the owners have any intention of selling the property prior to the death of the life tenant. 

Terms and limitations can be placed on the life estate and this must be considered when drafting the deed.  It is also possible for the life tenant to keep any real property tax exemptions, such as the STAR, Senior, Enhanced and Veteran exemptions, they have on the property.  This is an important consideration and may be vital for someone to afford to remain living in the home.

Life estates are also very useful in the area of Medicaid planning.  One advantage is that retaining a life estate in real property reduces the value of the transfer for Medicaid purposes thereby reducing the length of the penalty period.   Medicaid cannot place a lien on a life estate, unless the home is sold while the life estate tenant is alive.  A disadvantage is that if the life tenant is a Medicaid recipient in a nursing home when the home is sold, a portion of the sales proceeds will be due to him/her.  These proceeds will then affect the recipient’s eligibility for Medicaid.  If the property is not sold, but is rented, the life tenant is entitled to the net rental income, which will be counted as income for Medicaid purposes and must be used for the recipient’s medical expenses. 

With recent changes in the Medicaid laws, life estates are being looked at in a new light.  Medicaid planners are now considering using assets to purchase a life estate in someone else’s home, thereby changing an available resource to an unavailable resource.  

The complex area of the use of life estates in Medicaid planning is beyond the scope of this article.  As there are significant legal and tax consequences to transfers with life estates, these matters should not be undertaken without consulting with an experienced elder law attorney.

To discuss your individual concerns,  This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

Joan S. Arbiter, Attorney at Law, P.C.
425 Broad Hollow Road, Suite 203
Melville, NY  11747
Phone: (631) 249-1976
Fax: (631) 777-3204

Melville, New York attorney, Joan S. Arbiter, helps families and individuals throughout Nassau County, Suffolk County, and the New York Metro Area to resolve legal issues in the areas of elder law, Medicaid planning, estate planning, probate, and real estate. Long Island communities she serves include Amityville, Commack, Dix Hills, Farmingdale, Hauppauge, Hempstead, Huntington, Babylon, Levittown, Massapequa, Melville, Mineola, Plainview, and Woodbury.