Life Estate

For many people, setting up a “life estate” is a simple and appropriate method for managing the house. A life estate is a form of joint ownership of property between two or more people. They each have an ownership interest in the property, but for different periods of time. The person holding the life estate possesses the property currently and for the rest of his or her life. The other owner has a current ownership interest but cannot take possession until the end of the life estate, which occurs at the death of the life estate holder. The life estate holder will remain responsible for the real estate taxes, and will continue to receive discounts on taxes that they currently enjoy. As with a transfer to a trust, the deed into a life estate can trigger a Medicaid ineligibility period of up to five years.

 

Example:

Jane gives a remainder interest in her house to her children, George and Mary, while retaining a life interest for herself. She carries this out through a simple deed. Thereafter, Jane, the life estate holder, has the right to live in the property or rent it out, collecting the rents for herself. On the other hand, she is responsible for the costs of maintenance and taxes on the property. In addition, the property cannot be sold to a third party without the cooperation of George and Mary, the remainder interest holders.

 

When Jane dies, the house will not go through probate, since at her death the ownership will pass automatically to the holders of the remainder interest, George and Mary. Although the property will not be included in Jane’s probate estate, it will be included in her taxable estate. The downside of this is that depending on the size of the estate and the state’s estate tax threshold, the property may be subject to estate taxation. The upside is that this can mean a significant reduction in the tax on capital gains when George and Mary sell the property because they will receive a “step up” in the property’s basis.

 

Life estates are created simply by executing a deed conveying the remainder interest to another while retaining a life interest, as Jane did in this example. In New York, once the house passes to George and Mary, the state cannot recover against it for any Medicaid expenses Jane may have incurred.

 

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