Types of Wills  /  Life Estates  /  Forms of Owning Real Property

        The life estate is good way to transfer

property at death.

 

Sunday, April 30, 2000

By RAYMOND J. BOWIE, Esq., special to the Napal Florida Daily News

Where there's a will, there's a way, it's been said.

But even better sometimes: Where there's a [life estate] deed, it can be considered done.

Such is the case with the property ownership concept called the life estate.

Most folks know that one way to transfer property upon death is through a will. Another way used by many is to take title to the property jointly with one's intended beneficiaries, with rights of survivorship (JTWROS). And increasingly popular, property owners can put title to their property into a trust which distributes it to their beneficiaries after their death. But a better way to transfer property at death for those with a small estate may be the less known device of the life estate.

For many less complicated estates (a home, small check account balance, home furnishings, etc.), a life estate deed may avoid the pitfalls of the other alternatives for passing on one's property: the probate proceedings required by a will, the liability and loss of control associated with joint ownership, the costs and complexity of setting up a trust and loss of the home due to Medi-Cal recapture in the event of a long term illness. As an estate planning device for real estate, once the title is properly deeded as a life estate, the estate plan for that property is done. See California Propositions 58 and 193 below.  

A life estate is a form of property ownership in which one owner is deeded a property for the rest of his life (or sometimes for the lifetime of a specified third person), after which it passes automatically to another owner who was also named in the deed. The lifetime owner is called the "life tenant", and his successor is called the "remainderman."

Creating a life estate by deed is fairly simple. The deed needs only to say something like: "to Mary for her life, then to John." This deed conveys to Mary the exclusive use and possession of the property for the rest of her life, and on her death John automatically gets the full title to the property. Under a life estate deed, Mary and John are both considered owners of this property, but they have different types of ownership interests: Mary has a life estate interest while John has the remainder interest.

A property owner desiring to avoid probate or trusts can deed his own property back to himself as the life tenant for the balance of his lifetime, and then designate in the same deed his intended beneficiaries as the remaindermen to take the property upon his death.

Because the life tenant and the remainderman both have ownership interests in the same property, common law has evolved to spell out the various rights and duties the parties owe to one another. These common law rules can complicate the holding of the property.

In a typical life estate, the life tenant and remainderman can only sell, convey or mortgage his own respective interest, which greatly limits either's control of the property. While the life tenant has present use and possession of the property, he cannot sell, diminish or cut off the remainderman's future interest. Few buyers or lenders would want to receive only the life tenant's lifetime interest in the property or the remainderman's future interest. Both the life tenant and remainderman would, therefore, have act jointly together to sell or mortgage the property.

Disputes have also arisen in typical life estates as to who, as between the life tenant and the remainderman, is responsible for the property's maintenance and improvements. Here, the law holds the life tenant responsible for all costs of operating and maintaining the property, while the remainderman pays for any improvements to the property he desires to make.

The law also holds that in a typical life estate, the life tenant cannot cause or allow any "waste" to the property. Waste is considered anything that permanently reduces the property's future value for the remainderman. The life tenant might be permitted, for example, to annually harvest a replenishable crop, but not to deplete the soil or to mine minerals. The life tenant is liable to the remainderman for any damages caused by such waste.

These various common law restrictions on the rights of a life tenant might indeed deter many property owners from using life estates as part of their estate planning. Many owners would be fearful of losing control of their property, being unable to sell or mortgage the property if unforeseen circumstances should require, as well as incurring potential liability to the remainderman in their use of the property.

Fortunately, a property owner creating a life estate may, in the terms of the life estate deed, enhance the powers of the life tenant and reduce the rights of the remainderman. It is this "enhanced life estate", as it is called, that allows for effective estate planning.

For instance, a property owner can retain for himself these additional powers as the life tenant in a deed creating a life estate for him with a remainder to his beneficiaries: The power to sell, mortgage, lease and manage the property without the consent or joinder of the remaindermen. This lets the life tenant retain complete control over the property during his life, including the power to sell the property free of the remainder interest. The only power the life tenant cannot retain is the power to devise the property by will at death.

The explicit right to retain lifetime use and possession of the property, which safeguards the life tenant's right to enjoy homestead exemption for the property.

Freedom from liability to the remaindermen for any waste to the property caused by the life tenant. This gives the life tenant maximum freedom of action to make use of the property any way he wishes during his lifetime, including demolishing improvements and depleting its assets.

The power to convey interests in the property as gifts, without receiving consideration or value. This allows additional flexibility if the life tenant should subsequently decide to make gifts of property interests as an estate planning strategy. Note that under this enhanced life estate concept, there is no guarantee that the remainderman will actually receive any remainder interest in the property, since the life tenant has the power to sell, gift or convey the property at any time. Or if there is a remainder interest left, that interest might be subject to a mortgage placed by the life tenant or diminished value due to the life tenant's use of the property. But no one ever said being an heir is a sure thing, anyhow.

The important thing is that the enhanced life estate gives the property owner an effective estate planning alternative to wills, trusts and joint property ownership. For the remainder interest that passes to the remainderman, there is no need for probate like a will. There is no need for the cost, complexity and need to involve a third party as trustee, as with a trust. One deed does it all. And it avoids the hazards of loss of control, uncertainty and exposure to liability involved in taking title to property as joint tenants with one's intended beneficiaries.

The life estate also provides a degree of asset protection for the property, since potential creditors of either the life tenant or the remainderman would perceive little value to be had in seizing only a life estate or remainder interest in a property.

For less complicated estates, or estates consisting largely of a home or other real estate; the life estate may indeed be the optimal estate plan, perhaps accompanied by a simple will. With a life estate deed, properly drafted, the estate planning for that property is done.

Download "Life Estate Facts": PDF  (168KB)  |  ZIP  (    KB)

PEGGY:
Dear Len, My mother passed away in March this year. On April 30th, my three sisters and I sold her home. We each received $44,417.83. What is our tax liability, if any? My mother had a
life estate deed prepared for her home ten years ago. Her wish was to be able to live in her home until she died and she wanted her property protected [from Medi-Cal] for her children from any liabilities she would incur in the future. She gifted the home to her four daughters but we were unable to take ownership of the home until her death. Is this home considered as part of my mother's estate since she had a life estate, or was it a gift ten years ago even though we couldn't do anything with the property until she died? My one sister's accountant says there will be no tax liability since it was a life estate and we didn't receive it until after her death. My other sister's accountant said there may be a tax liability. Help! I'm totally confused now.

LEN:
Dear Peggy, When your mother signed the life tenancy deed ten years ago, she split her property into two separate interests: a life estate, which she kept for herself, and the remainder interest, which she gave to you and your sisters. The life estate was your mother's retained right to use and enjoy the house for the rest of her life. Your remainder interest was simply what was left over when the life estate terminated on your mother's death. Until your mother died, she had the exclusive right to possess and use the property. This is why you couldn't do anything with the property before your mother's death. The IRS considers your mother's retained life estate to be a large enough property interest to pull the house back into her federal death tax estate after her death. The entire house is subject to federal estate tax. If the total value of all of your mother's assets on the date of her death, including the entire value of the home, was worth more than Unified Credit Exemption Equivalent ($1,000,000 for 2003), then your mother's probate estate will have to pay the estate tax that is due. If there is no probate estate, then you and your sisters will have to pay the estate tax, because you are the ones who have inherited your mother's assets. If everything your mother owned was worth less than $1,000,000 then there will be no federal estate tax, unless your mother reduced her Unified Credit by excessive gifting. There is no California state inheritance tax. Because the house is in your mother's federal taxable estate, the capital gains tax basis of the house was stepped up to the value of the house on the date of your mother's death. Because you and your sisters sold the house shortly thereafter, there should be no gain for you to pay capital gains tax on. Still confused? Even attorneys and accountants get confused when dealing with estate issues. Never assume that your accountant knows what to do. Your tax preparer may be able to tell you what to do on April 15, but he may not know what to do after someone dies. Before you hire an attorney or accountant for estate work, make sure he knows what he's doing. Ask them how many 706's he has done. If he doesn't even know what a 706 is (a Federal Estate Tax Return), go somewhere else.

Len Tillem is an elder law attorney in Sonoma, CA. Len answers legal questions each Saturday & Sunday, 4-7 PM, on KGO Radio 810 AM.

[One item not addressed above is that of Medi-Cal recapture avoidance. Usually, in small estates, since the "life estate" final interest amount is passed on the the remainder interest parties one moment before the life tenant's last breath started; Medi-Cal has no legal right to recapture what the life tenant did not own at the exact second of their last breath exhaled. Sounds a little morbid but the law is the law.]

 PROPOSITION 58/193 ELIGIBILITY REQUIREMENTS:

Section 63.1 of the Revenue and Taxation Code and Article XIII A Section 2(h) of the California Constitution.
 

  1. Transfers of real property between parents and children, and between children and parents are excluded from reassessment.

    Transfers of real property from grandparents to grandchildren are excluded from reassessment. Transfers from grandchildren to grandparents, however, are NOT excluded from reassessment.
     
  2. The seller's or decedent's principal residence is totally excluded from reassessment. In addition, $1,000,000 of the seller's or decedent's other real property is also excluded. There is a qualification to this rule under Prop 193. If the grandchild had received property in the past that was excludable under Section 63.1 of the R & T Code as a principal residence, any principal residence that the grandchild receives from the grandparent is considered "other real property" that is subject to the $1,000,000 limitation.
     
  3. There is no value limit for excluding the seller's or decedent's principal residence from reassessment. A Homeowners' Exemption or Disabled Veterans' Exemption must have been granted to the seller or decedent. This residence need not be the principal residence of the person who acquires the property.
     
  4. The $1,000,000 exclusion, for real property other than the seller's or decedent's principal residence, applies to the assessed value of property immediately before transfer. In other words, real property other than the principal residence, with an assessed value up to $1,000,000 is excluded from reassessment. The sales price or actual "current market value" does not affect the $1,000,000 limit. The $1,000,000 exclusion that is available to grandchildren for property other than a principal residence received from their grandparents is the same $1,000,000 exclusion which they have remaining available from their parents under Proposition 58.
     
  5. The total value of property (or properties) which a parent may transfer to all children without reassessment is $1,000,000 of assessed value, for property other than the principal residence.

    This limit is cumulative over time. After property (or properties) with $1,000,000 of assessed value is transferred without reassessment, all future transfers will be reassessed (except the transfer of the principal residence if it has not already been transferred).

    The $1,000,000 limit applies only to transfers of properties within the State of California. Transfers of properties in other states are not included in establishing the $1,000,000 limit.
     
  6. The $1,000,000 exclusion is a limit for each parent separately. Community property of married parents would have a $2,000,000 limit. Proposition 193 specifies that a grandchild can have excluded only $1,000,000 of property transferred from his or her father AND his parents (paternal grandparents) and $1,000,000 of property transferred from his or her mother AND her parents (maternal grandparents).
     
  7. Transfers by sale, gift, devise or inheritance qualify for the exclusion.
     
  8. Transfers between parents and children as individuals, from grandparents to grandchildren as individuals, between joint tenants, from trusts to individuals, or from individuals to trusts may qualify for the exclusion.

    Transfers of ownership interests in legal entities do not qualify for the exclusion. Transfers through the medium of a trust, however, may qualify for the exclusion.
     
  9. Currently, the person who acquires the property must file the claim within three years of the date of transfer, but before transfer to a third party; or within six months after the date of mailing of a Notice of Assessed Value Change, issued as a result of the transfer of property for which the claim is filed, whichever is later. There are limited exceptions to these deadlines under new legislation (Senate Bill 542) which affects 1998-99 fiscal year taxes and thereafter. The property, however, must not have transferred to a third party.                                 Back
     

Top  /  Probate  /  Home

 

Powered by OptIn Lightning!

Free Newsletter:
Powered by OptIn Lightning

Name:
Email:


 

 
C. Francis Baldwin
chasbaldwin@surewest.net
Updated Wednesday, May 26, 2004