What is a Life Estate?

As part of a comprehensive estate plan, there are several tools to choose from to tailor to your needs and priorities. A life estate deed allows one to have an ownership interest in a property for the duration of their life, meaning they have a legal right to occupy the property until their death.

The person is typically called the “life tenant” and can use or possess the property. The life tenant can also collect any rent or profits from the property and is responsible for any maintenance costs that the property may need.

How To Create a Life Estate

By working with an experienced estate planning attorney, you can create an enforceable life estate deed stipulating who you will deed the property to upon your death. Once you have passed away, the “remainderman” you have listed will obtain the ownership interest on the property.

The remainderman receives full ownership rights and authority at the time of your death without having to take extra steps, as stipulated in the life estate.

Benefits of a Life Estate

If you were to deed a property to another before your passing, instead of a life estate, the person to whom you transferred ownership would have the rights to the property, meaning they could sell it at any time, leaving you without a home. By creating a life estate, the ownership takes place at the time of your death and never before, meaning you maintain the rights for as long as you live.

Another highly appealing characteristic of a life estate is that by using an effective one, you can maintain the options for Medicaid eligibility typically in a shorter time than if you were to apply with the property still in your name. The Department of Social Services would take a portion of the fair market value of your home vs. the fair market value in its entirety, making eligibility easier for the homeowner. Without a life estate, the home’s fair market value would be used in calculations, which can either push you out of the eligibility guidelines for Medicaid or force you to wait a more extended period before you are eligible. At the same time, you pay for your long-term care needs out of pocket.

Does the Property Go Through Probate?

One of the main priorities for those considering an estate plan is to protect assets, avoid probate, and plan for tax implications. The probate process can be long, and costs, including lawyer and processing fees, can add up quickly.

Assets not directed to a beneficiary through an estate planning tool, such as a life estate, trust, or will, can be subject to the probate process. Your heirs won’t have full access to those assets during this time. With a life estate, the property generally doesn’t have to go through the probate process and instead is transferred at the time of your death, allowing your heirs full access immediately.

What Are the Tax Implications for Property In a Life Estate?

The life tenant remains the sole owner for purposes of taxes throughout their lifetime. This ownership interest can mean that the property owner can still be eligible for programs like the School Tax Relief (STAR) program that provides tax relief to property owners.

Veteran’s benefits and all other tax reduction programs are also attainable while the property owner is alive and eligible for said benefits.

Additionally, the home’s fair market value would typically be part of the gift tax limit both through New York state and federally. The gift tax limit can change, but as of currently, the gift tax for New York is $300,000. The federal gift tax limit is $650,000, meaning that barring other large gifts given by the homeowner in that same tax year, they would have limited or no tax implications unless the fair market value exceeded the gift tax limits.

Is a Life Estate The Best Option for Me?

A wide array of estate planning tools are available to us, depending on our situation. What may work best for your neighbor or friend may not be the best option for you and your family’s priorities. For example, suppose you have worked in an industry throughout your life that requires added protection from creditors, such as a doctor or lawyer. In that case, you may wish to pursue options that allow added protection from creditors by transferring the interest in your property to a trust while you are alive instead of a life estate.

All estate planning tools are not a “one size fits all” approach. Instead, each option will have appealing advantages or discouraging disadvantages depending on each person’s entire estate value, the protection they require for their assets, and the tax implications they or their heirs will face.

Maintain Control of Your Legacy

You have likely worked your entire life to build the assets that you now possess. Our instincts typically tell us to protect and provide for our loved ones. An effective estate plan can allow for just this, providing you with tools to continue protecting and providing for your family long after you are gone.

With an experienced estate planning attorney, you can work together to create an effective strategy that not only meets but exceeds your expectations. The investment you make into estate planning can also save significant future costs, whether through tax savings, probate process fees, and more.

Contact our office today at (917) 920-6437 to get started. We are passionate about our clients and respect your need to plan ahead. We look forward to serving you and your family’s needs