Most of our clients recognize that an outright transfer of their home to their children during their lifetime is usually not a good idea. For this reason, the premise of a Life Estate is appealing: A client can keep the use and occupancy of his or her home during his or her lifetime; then the ownership of the home passes to his or her children automatically upon the client’s death, avoiding probate and creditors alike. Although Life Estates tend to be inexpensive estate planning tools, a Life Estate does not work for everyone and is often appropriate in limited circumstances.
A classic example is such: Mom is a widow who is 75 years old and lives in a New Jersey home that is worth $350,000, with no mortgage. Mom has two adult children, Adam and Beth. Mom visits an attorney, who assists her in executing a life estate deed. The legal effect is such that Mom keeps a life estate interest in the home (the right to use and occupy the home during her lifetime). Mom is called the “life estate holder.” Her two children, Adam and Beth, own the property subject to a life estate and have a “remainder interest.” Each child is typically called a “remainderman.” Adam and Beth will take full title to the home automatically when Mom dies, without probate and free from claims by Mom’s creditors.
Assuming Mom never moves, never gets sick, does not have significant other assets, and never runs out of money, then this Life Estate works out well. However, if you add any of the following events to this fact pattern, the Life Estate proves to be detrimental.
- As Mom gets older, she decides to downsize her home. She goes to sell her home, only to find out that as a life estate holder, she cannot transfer, sell, or mortgage her home without the joinder of the remaindermen. Also, Mom will need to split the proceeds from the sale with Adam and Beth, based on the proportion of the remainder they are deemed to own pursuant to the life estate. This proportion is determined by an IRS actuarial table. Finally, Adam and Beth may have to pay a capital gains tax on the remainder of the proceeds of the sale, to the extent those proceeds exceed the carryover basis they received in the property when the property was gifted to them.
- Mom is rushed to the hospital due to emergency medical issues. Mom is then told she cannot be released home because of her medical issues. Mom goes to a rehabilitative facility for a few weeks, then is discharged to a long-term care facility or nursing home, which costs $10,000 per month. Mom has to sell her home to pay for her care, but only with consent of the remaindermen, as in the previous example. If Mom then runs out of funds and needs to apply for Medicaid, and if the transfer of the home via a life estate deed occurred within 5 years, Mom will be ineligible for Medicaid for a period of time because of her gift to Adam and Beth. Even if Mom wishes to have her children return the remainder interest, she would need their full and voluntary cooperation, and her children could be subject to additional taxes.
- Mom wants to make some improvements or repairs to the home. She goes to the Bank to qualify for a home equity line of credit, but is denied because there is a life estate on the property. Most banks will not issue lines of credit in such cases, even if Mom’s children, as the remaindermen, join in the application.
- Adam has financial issues and pursues bankruptcy. Mom dies, and Adam automatically becomes the 50% owner of Mom’s home, with Beth owning the other 50%. Adam’s interest in Mom’s home can be subject to the claims of Adam’s creditors.
- Beth has marital issues and goes through a divorce. Mom dies before Beth’s divorce is finalized, and Beth automatically becomes the 50% owner of Mom’s home, with Adam owning the other 50%. Beth’s interest in the home may now be subject to claims by her soon-to-be ex-spouse.
- Adam and Beth have a falling out after Mom dies. They cannot agree on how to deal with Mom’s home that they equally own. Adam wants to sell the home at the fair market value. Beth wants to buy Adam out of his interest at a family discount, but does not have the means to pay him. Unless they can resolve this situation, they may each wind up hiring their own attorneys or commencing legal action against one another.
- Mom’s elderly friend lived with Mom during her last few years and helped take care of Mom. Mom wishes to assign her life estate to her friend in gratitude, but then dies without making the assignment. Mom’s friend must move out right away because Adam and Beth now own the property. Or, Mom’s friend may refuse to move out, in which case Adam and Beth now need to seek an ejectment or some other legal recourse against Mom’s friend.
- Adam dies before Mom dies. Adam has 3 children, 2 from a prior marriage and 1 from a current marriage. Adam’s widow has an elective share claim of at least 1/3 of his estate as his spouse under New Jersey law, even if Adam has a Will conveying his interest in Mom’s home to Beth or Adam’s children, and therefore Adam’s widow may have an interest in Mom’s home. Or, if Adam did not have a Will, then Adam’s widow and his children would all have possible claims against the 50% of Mom’s home, pursuant to New Jersey intestacy laws. This can all be complicated further if Adam dies as a resident of another State with differing intestacy laws.
Clearly, all of Mom’s intentions in creating the life estate in the first place can be negated by such subsequent events. And, most of these issues could have been corrected or avoided by a properly drafted Will or Trust. An experienced elder law and estate planning attorney will be able to guide you through the determination of whether a Life Estate is right for you.
Please do not hesitate to contact our Estates and Trusts Practice Group Attorneys and Paralegals if you have any questions or would like assistance in preparing or reviewing your estate planning documents: Renata Mizak, Esq. (firstname.lastname@example.org); Jessica Jansyn, Esq. (email@example.com); Richard Sweeney, Esq. (firstname.lastname@example.org); Colleen Hewitt (email@example.com); Laurie Spangenberg (firstname.lastname@example.org); Jessica Bisanzio (email@example.com). Our attorneys and paralegals can also be reached by phone at (973) 729-1880.