What Is a "Life Estate"?
Multiple people can own a single property at the same time, and for different durations. A "life estate" refers to an ownership interest in property the duration of a person’s life. This person is called a “life tenant,” therefore he or she is allowed to possess and use the property, can collect rent and profits, and is responsible for the costs of maintaining the property.
After the life tenant passes away, his or her ownership interest passes on to other people referred to legally as "remaindermen.” The life tenant has a legal responsibility not to sell or waste the property without the remaindermen’s consent.
How Is a Life Estate Created?
You can create a legal life estate in real property by conveying the property using a deed, which creates the life estate for the life tenant. The deed also creates a "remainder interest" for the remaindermen who will receive full ownership immediately at the life tenant’s death.
What Are Some Benefits of a Life Estate in a Personal Residence?
The life tenant has the legal right to remain in her house for as long as she lives. If she transferred her house outright, however, the new owner could legally sell the property the next day, forcing her to vacate the premises. With a life estate, the property can pass immediately to the remaindermen without the necessity of a probate proceeding.
How Do Life Estates Work with New York Medicaid?
A life estate can also be useful for purposes of Medicaid eligibility and protection from Medicaid recovery by the state. As an example, Jane Doe, a 69-year-old widow, owns a home in Westchester County, New York with a fair market value of $250,000.00. Her home is her most valuable asset, and she wants to leave it to her son. Jane has a progressive illness that renders her ineligible for long-term care insurance. Therefore, she may have to apply for Medicaid as her health declines.
Jane can draft a deed that retains a life estate for her with the remainder to her son. For Medicaid eligibility purposes, the transfer to Jane's son is not the property's fair market value of $250,000.00. Instead the value of the transfer of the remainder to the son is calculated according to tables used by the Department of Social Services. DSS determines the house is .37914% of the fair market value of $250,000.00 or $94,785.00. If Jane had simply transferred the house to her son she would not be eligible to receive Medicaid until 36 months from the date the deed is executed. By retaining a life estate, Jane will be eligible to receive Medicaid after only 14 months have passed form the date of the execution of the deed.
The New York State Department of Social Services recognizes that a life estate is a "limited interest in real property.” Therefore, the state will not require Jane to sell the property, nor will the state place a lien on the property as a condition of Medicaid paying a nursing home for Jane's care.
New York Medicaid laws and regulations limit recovery to probate assets of the Medicaid recipient or her spouse (in our example Jane is a widow). Since the life estate expires upon Jane's death, the property passes to her son out of probate and is therefore not recoverable by the state.
What Are the Tax Ramifications of Creating a Life Estate?
The life tenant remains the owner for purposes of real property tax administration. Therefore, he or she continues to qualify for the STAR exemption, veteran's benefits, and any other property tax reduction available to the "owner" of the property.
Under tax laws coering how gifts are taxed, the gift tax value is the full value of the property, without any discount. Therefore, in the above example for gift tax purposes Jane transferred her home valued at $250,000.00 while retaining a life estate. If the deed is executed in 2014, by April 15, 2015 she must file a federal gift tax return that should report that Jane used $250,000.00 of her $650,000.00 federal gift tax credit. Jane’s New York State gift tax return should report that she used $250,000.00 of the $300,000.00 New York Gift tax credit. She would not have to pay any federal or state gift taxes as long as she had not made any other large gifts which previously used her federal and state tax credits.
Other Life Estate Considerations
While a life estate can be advantageous in a Medicaid context, individuals with larger estates and significant estate tax exposure should consider other options, such as the Qualified Personal Residence Trust. The life estate is only one of many estate planning and asset preservation tools. It is important to consult with an attorney in your state regarding Medicaid, real estate, tax, and estate administration laws applicable to your personal circumstances.
Life estates can be a complex intersection of real estate law and probate law. It may be helpful to consult with an experienced real estate attorney in New York. You can also find more general information on this topic in FindLaw’s New York real estate law section.
Contact a qualified attorney.