I've searched; and the term "life estate" document seems universal in legal terms for many U.S. states. I have not searched every state interpretation. The "life estate" search revealed that the word(s), deed or trust may or may not be combined.
??? Does this phrase language have different legal meanings? Being life estate and life estate deed.
??? The document provides that upon the death of the Grantee, the Grantor (remainderman) becomes the legal owner. The document is more generally used for real estate; whether a residence or land.
??? Primary question: If the beneficiary (Grantor) chooses to sell the property after taking ownership (death of Grantor); is their stepped up cost basis (for tax purposes) the date of their ownership, OR the original date of the "Life Estate" document? It appears that the change of ownership is the key date; but perhaps I assuming something I should not.
BROAD sample description below.
A life estate deed is a legal document that changes the ownership of a piece of real property.
The person who owns the real property (in this example, Mom) signs a deed that will pass the ownership of the property automatically upon her death to someone else, known as the "remainderman" (in this example, Son). As part of the deed, Mom keeps what is called a life estate, which means she can continue to live on and use the property for the rest of her life.
She becomes a "life tenant." The deed would normally include language like "to Mom for life, to Son as the remainder." The life estate deed is completed when Mom signs the document and it is filed with the county.
--- Benefits of a Life Estate Deed
There are many benefits to creating a life estate deed, sometimes called a life estate trust:
---Avoid probate. Mom gets to pass her property to Son without its having to go through probate. When she dies, he becomes the owner without a court proceeding
---No will necessary. Mom doesn't have to include the property in a will. She signs the deed and it's done.
---Emotional relief. Mom signs the deed and knows that she doesn't have to worry about what is going to happen to the property after her death.
---Avoid gift tax. Using a life estate property deed can be preferable to an outright gift from Mom to Son during Mom's life, because that could be subject to gift tax.
---A place to live. A life estate deed is often used to provide housing for someone until they die. Mom might own a home in her own name and create a life estate deed that gives her much younger husband (Stepdad) a life estate in the property so ----Mom can be assured he will always have a place to live. She can leave the remainder to Son, so he will get his inheritance once Stepdad dies.
--- The Drawbacks of a Life Estate Deed
In addition to benefits, there are some drawbacks that should be considered before deciding on this course.
---Loss of control. While Mom gets to live ion the property for the rest of her life, she can't sell it to anyone, take out a mortgage, or control what happens to it after her death. If Son dies before Mom does, his heirs become the remainderman in his place. This might not be what Mom intended, yet she has no control over it.
---No easy reversal. A life estate deed is a legal transfer of title in the property. Mom can't undo it if she changes her mind, unless Son agrees to transfer it back to her.
---Property taxes. Mom must continue to pay property taxes on the home during her life, which would not be the case if she gifted or sold the property to Son during her lifetime.
Note: I have not yet queried an attorney.
Thank you and don't hesitate with questions or clarifications.
Catch
Comments
A little bit of terminology - grantor refers to the one signing the deed, "granting" and splitting the property between two owners - the owner of the life estate (aka life tenant) and the owner of the "post-death" property (aka remainderman or remainder beneficiary).
https://www.deedclaim.com/life-estate/
As noted in that piece, one can achieve much the same effect with a simple TOD deed, assuming your state supports that. Most people here understand TOD and many have attached that to their brokerage accounts. Life estates are more complicated. Which is not to say they don't have additional or different benefits, but rather that there may be simpler mechanisms available depending on what you are trying to achieve.
Edit: There is a gift tax upon the present transfer of the future (remainder) interest in the property. Because this is a gift of a future interest, the $16K annual exclusion for gifts doesn't apply. In theory the gift tax could lead to double taxation. The IRS handles this as described below.
The grantor (original owner) gifts a life estate to the life tenant and a future interest to the remainderman. That's a gift that gets counted against the $12M lifetime exclusion (adjusted annually, but scheduled to be cut in half in 2026). In addition, the whole value of the property is included in the life tenant's estate when calculating estate tax.
In the usual case - the grantor retains a life estate - it would appear that the property value gets counted twice in the same estate tax calculation. That's because the grantor and life tenant are one and the same. So the property is taxed as a gift (to oneself), and also as property owned at death. It looks like the answer is that the IRS deals with this by cancelling the gift tax portion. But only if the grantor and life tenant are the same person. So there can be a gift tax, depending on who is getting the life estate. http://archives.cpajournal.com/2001/0600/dept/d067001.htm
See also IRC §2001(b) (adjusted taxable gifts).
As to taxation,
as you note, there is no gift tax upon signing of the deed, but there's still an estate tax: http://www.nysscpa.org/most-popular-content/transfer-of-a-primary-residence-the-tax-and-long-term-care-consequencesIn the example above, the grantor and life tenant were one and the same, so it wasn't clear whether it was the grantor's estate that included the property for estate tax purposes or the life tenant's estate that did. Common sense suggests the latter - since the grantor gives away everything (though perhaps to him/herself). Massachusetts seems to confirm that: https://www.berkshireelderlaw.com/life-estate-ownership
I suspect that the step-up would be somewhat different if the grantor used an alternate valuation date for estate tax purposes, but that's beyond the scope of your question.
Other tax questions you didn't ask:
What happens with the $250K gain exclusion for homeowners - who's home is it, who is selling it, does anyone get that exclusion? While the life tenant is alive, if the property is sold, it is the life tenant - assuming the life tenant is living there - that gets the exclusion.
https://www.ellenbecker.com/resource-center/estate/estate-building-block-understanding-the-alternate-valuation-date
What happens with state benefits for home owners? For example, in NYS, owners of owner-occupied homes get a modest property tax break ("STAR"). For this purpose " in the eyes of law, as long as the holder of the life estate is alive, the property is 'owned' by him or her." I suspect that's the typical treatment by various states and agencies.
https://www.tax.ny.gov/pit/property/star/assessorguide.htm
As always, I am not a lawyer or accountant. Heck, I'm barely a professional of any type. I'm just passing along a little information.
Sure. Tell me another. You're sure faking it nicely.
Thank you for your time and effort with the reply.
I'd already done research on this topic, and you've added further to the research.
Aside from any other conditions/circumstances; it appears that a Life Estate establishes a cost basis for the remainderman upon the death of the Grantor. Obviously, being of benefit; if and when the remainderman chooses to sell.
And if one chooses to use T.O.D.'s and/or P.O.D. 's for various other financial assets to help smooth some account(s) transactions upon death.
I've added some additional information regarding Michigan in particular.
Hopefully, others may have benefit with this topic.
Regards,
Catch
This method also exists in Michigan:
*** What is the Lady Bird law in Michigan?
In Michigan, a Lady Bird Deed (also known as a Ladybird Deed or Enhanced Life Estate Deed) is a type of Quitclaim Deed that allows you, the creator, to transfer your property upon your death to a named beneficiary without having to go through the expensive and time consuming Probate process.
--- A copy/paste regarding Michigan estate/inheritance:
Does Michigan Have an Inheritance Tax or Estate Tax?
Michigan does not have an inheritance tax. Its inheritance and estate taxes were created in 1899, but the state repealed them in 2019.
Its estate tax technically remains on the books, but since 2005 there has been no mechanism for it to collect it. That’s because Michigan’s estate tax depended on a provision in the Internal Revenue Tax Code allowing a state estate tax credit against the federal estate tax. When congress eliminated that credit in 2005, it effectively killed Michigan’s estate tax.
Note that estate and inheritance taxes are different things. Estate taxes, where they exist, are taken out of the deceased’s estate immediately after their passing. Inheritance taxes, conversely, are imposed upon the deceased’s heirs after they have received their inheritance.
Michigan also does not have a gift tax. Remember, the federal gift tax is applied once you give any individual more than $16,000 in a single calendar year. Give any less than that, and there is no federal gift tax whatsoever.
Other Necessary Tax Filings for Estates
Inheritance taxes: Michigan does not have an inheritance tax, with one notable exception. It’s only applied to an estate’s beneficiaries if the decedent passed away on or before Sept. 30, 1993.
Both federal and state income tax returns: The estate of the deceased must file individual state and income tax returns one final time, due by the tax deadline in the year immediately following their death.
Federal estate tax: The decedent’s estate may be responsible for paying the federal estate tax if the estate is valued at more than $12.06 million ($24.12 million for married couples). If so, the estate will be taxed on the overage, not the entire value. Federal estate taxes are due nine months after the date of death.
https://smartasset.com/financial-advisor/michigan-inheritance-laws I know my post above wasn't my best writing, but I don't think I wrote anything inconsistent, like saying that a law was both repealed (in 2019) and still on the books.
It appears the law remains on the books, but that because of the way it is linked to federal estate taxation, the maximum amount of the estate tax is $0. Something like the ACA mandate still being on the books, but the amount of the penalty being set to $0.
Quoting from a late (Oct) 2019 bill that would have repealed the Michigan state tax but died in the legislature: https://www.michiganvotes.org/2019-HB-4922
That's why it matters whether the estate tax was repealed (no longer off the books) or merely dormant. (Think of another old law in Michigan, this one from 1931, that was nearly resurrected when Federal law changed this summer.)
The more interesting piece IMHO concerns the Lady Bird deed. This piece came from the Rochester Law Center, and as such the errors and omissions on that page are somewhat disappointing.
https://rochesterlawcenter.com/services/michigan-lady-bird-deed/
A Lady Bird deed is not a type of quitclam deed (though depending on how it is written, it could be used as one). The salient feature of quitclaim deeds is that they enable the person transferring property to do so while disclaiming any title. That is, "I give all my interest in BlackAcre to A, whatever that interest is, which may be nothing at all. Lots of luck." https://legalbeagle.com/8083490-comparing-deeds-lady-bird-deeds.html
Most of the advantages stated for the Lady Bird deed (i.e. the ones apart from being able to change beneficiaries) are the same as for the simpler (once and done) non-enhanced life estate deed. IOW, had the Law Center said, rather than a Lady Bird Deed being a type of quitclaim deed that it was a type of life estate deed, it would have been essentially correct. But see below (notable Medicaid difference).
All life estate deeds, enhanced or not, keep the property out of probate. In this respect, there's nothing extra special about the enhanced (Lady Bird) deed in avoiding Medicaid recovery.
What differentiates an Enhanced Life Estate Deed from a (nonenhanced) Life Estate Deed is that the grantor retains control over naming beneficiaries in the former. That is sufficient to make the gift (deeding the property to the life tenant and the remainderman) "incomplete".
Rochester Law Center writes: "a Lady Bird Deed allows for you to qualify for Medicaid benefits while preventing the government from going after your home. " That's misleading. In looking at assets to determine Medicaid eligibility, Michigan doesn't count your home if your equity interest in it is under $636K.
https://www.medicaidplanningassistance.org/medicaid-eligibility-michigan
However, and this is where the Lady Bird deed can come into play, any asset that is transferred, including a home, within five years of applying for Medicaid, does count.
https://www.michiganlawcenter.com/blog/2020/august/transferring-assets-to-qualify-for-medicaid/
But since the Lady Bird deed is an "incomplete" gift, even though the home is transferred it isn't counted as an asset for Medicaid eligibility purposes.
Finally, though this has focused on Michigan, it's worth noting that Michigan is one of only five states that allow Lady Bird deeds. There are 30 states (Michigan isn't one of them) that allow TOD deeds.
https://www.nolo.com/legal-encyclopedia/lady-bird-deeds.html
https://www.nolo.com/legal-encyclopedia/free-books/avoid-probate-book/chapter5-1.html
Thank you for your follow up information.
Michigan.gov inheritance tax
Michigan.gov estate tax
'Course, not everyone will have the same circumstance(s) in dealing with financial assets.
And no one should proceed without proper consultation from a competent tax attorney in one's state/or states.