SOME Important Facts About Your Life Estate Deed
- Ownership: You have chosen to transfer your residence to your children, but you have retained the right to reside in and otherwise utilize your property for the rest of your life. You will not be required to pay any rents to reside in the property. In fact you are entitled to any rents or other income generated from the use of the property during your life. Along with these rights you continue to be obliged to continue to make any mortgage payments and to pay all taxes and insurance on the property and to maintain and effect general repairs on the property during your lifetime.
Nonetheless, your children now have an ownership interest in the property. The property will pass to them without the need for probate on your death. Although they are not responsible for the general upkeep of the property, they are responsible to cover the costs of any capital improvements required during your lifetime.
If you choose to sell the property during your lifetime, your children must sign off on the sale and they will be entitled to a portion of the sales proceeds. In the event of a sale, you should seek the assistance of an attorney, accountant or an actuary to determine how the proceeds are to be divided between yourselves as the lifetime beneficiaries and your children as the remaineder beneficiaries. As you age the portion you will be entitled to on sale will get smaller and the portion your children are entitled to will grow larger.
- Medicaid: Under prior law, the transfer of your property would not be counted against you should you require Medicaid for “Home Care” purposes, also referred to as “Community Care”. However, a change was made to this law in 2020 and as of October 1, 2020 all non-exempt transfers made within 30 months of application will generate a period of ineligibility for Community Medicaid Purposes. In addition, if you apply for “Chronic Care Medicaid” in an institution, such as a nursing home, the transfer of your property will be counted against you for the first five years following the date of transfer. The value of the remainder interest transferred to your children will generate a penalty period or a period of ineligibility for Medicaid based on the value of the property transferred. Since you have retained a life estate, the full value of the property will not be counted against you for Medicaid, purposes, but only the value of the remainder interest transferred to your children. In addition, if the property is sold during your lifetime, you will be entitled to a portion of the sales proceeds and those proceeds will be counted as an available resource to you and will be subject to spenddown rules for Medicaid purposes.
Note: As previously discussed, if instead of a life estate deed you had elected to transfer your property to a grantor style Irrevocable Medicaid Asset Protection Trust, then once the applicable look back period expires (measured from the date your property is transferred), then any sales proceeds would have been paid into your trust and no portion of the sales proceeds would be countable for Medicaid purposes.
- Taxes: As long as you continue to live in the property in which you have retained a life estate, you will be treated as the owner for estate tax, property tax and ordinary income tax purpose and in the event of a sale during your lifetime, you will be considered an owner of the property along with the remainder beneficiaires (your children) for capital gains purposes.
- Property Taxes: As long as you continue to reside in the property you will be considered the owner responsible to pay the property, school and any other taxes on the property. Any exemptins or discounts you may have had prior to executing the life estate deed, including, but not limited to “Star”, “Senior Star”, “Veterans Exemptionsl” and the like should remain in place as long as you reside in the property.
- Estate Taxes: If you retain your life estate up until the time of your death, the property will be included in your estate at its full fair market value at the time of your death. If the property is jointly owned with your spouse, then one half the value of the property will be included in your estate.
- Income Taxes: In general, any income earned from the use of the property during your lifetime from rents, timber, mining or the like will be considered your income.
- Caital Gains Taxes: To the extent that the property is included in your estate for estate tax purposes, your heirs will receive a step up in basis to the fair market value of the property at the time of your death, thus eliminating any built in gains for income tax purposes at the time of your death. For example if the property was worth $100,000 on the date of your death, then the basis of your herirs would be $100,000 as of the date of your death and if they sold the property shortly after your death for $100,000 they would not incur a capital gain.
On the other hand, if you sell the property during your lifetime, you and your remainder beneficiaries may be subject to capital gains to the extent that the sales price exceeds your baisis in the property. As long as you still reside in the property at the time of sale your exclusion from capital gain of up to $250,000 for an individual or $500,000 for a married couple should apply to your portion of the sale. However, if you remainder beneficiaries (your children) do not reside in the property, then their basis in the property will be a percentage of the total basis in the property. The percentage of their ownership and their basis will be calculated on an actuarial basis, based on your age and the applicable federal interest rate at the time of sale. To the extent that their portion of the sales price exceeds their basis, they will incur a capital gain and your exclusion from capital gain will not apply to their share.
For example assume the following: Your basis in the property at the time of sale is $20,000; the sales price is $100,000; at the time of sale, your interest in the property is calculated to be 30% and that of your children is calculated to be 70%. (These percentages will vary with your age and the prevailing applicable federal rate at the time of sale) Your exclusion from gain would eliminate any capital gain on your 30% share. However, after applying 70% of the $20,000 basis or $14,000 to their 70% share of the sales price which would be $70,000 your children would incur a gain of $56,000.
Note: As previously discussed, if instead of a life estate dead you had elected to transfer your property to a grantor style Irrevocable Medicaid Asset Protection Trust, then you and the Trust would have been treated as one and the same for tax purposes your exclusion from capital gain would exempt you from the first $250,000 of gain for an individual or $500,000 for a married couple and no other parties would recognize any gain on a sale during your lifetime.
- Probate: If you transfer your property to your children, retaining a life estate in the property, full ownership in the property will vest automatically in your children at the time of your death, without the need for probate.