LIFE ESTATE DEEDS WHEN ESTATE PLANNING: HOW DOES IT WORK AND IS IT RIGHT FOR ME?

A life estate deed is one of the greatest solutions for transferring property to another person when passing away. Life estate deeds are approved in the state of Maryland and in most states’ legally, and they may help you skip the costly and time-consuming probate process. However, there are pros and cons to consider for life estate deeds. It’s critical to examine the benefits and drawbacks of this property ownership transfer instrument before deciding whether or not to utilize it. Let’s take a closer look at the pros and cons of having a life estate deed.

What is a Life Estate Deed?

A life estate deed is a standard way to create a life estate. Let’s pretend you own a home. You can draft a life estate deed with your daughter as the remainderman and you as the life tenant. The deed passes title from you to yourself only while you’re living, and then to your heir after you pass away.

A life estate deed is a brief legal document that establishes a life estate. It must be lodged with the local recording office to be legitimate.

A Life Tenant with full powers v. a Life Tenant without full powers.

A life estate with powers means that the life tenant has the unconditional power to sell, devise, gift, mortgage or otherwise transfer the property and the remainder interest is contingent and vests only at death of life tenant(s). A life estate without powers means that the life tenant has no power to sell, devise, gift, mortgage or otherwise transfer the property without the consent of the remainder person(s) and the remainder interest is vested immediately at execution of deed.

The Benefits of a Life Estate Deed

There’s no doubting that, when compared to other property-transfer legal documents, a life estate deed has several pros and benefits. These advantages include:

The opportunity to avoid having to go through probate. Probate is a time-consuming and generally expensive procedure in which legal professionals determine who inherits a deceased person’s property or inheritance. A parent can use a life estate deed to convey their property to their children without having to go through the probate legal process.

Avoid Estate Taxes. As the real property passes directly to the beneficiary upon death of the life tenant, the real property is not considered part of the descendants estate and is therefore not subject to estate taxes.

Reduced capital gains taxes for remainderman. One of the biggest advantages of the life estate deed and one of the main reasons individuals opt to utilize them is the ability to reduce capital gains taxes for the remainderman after death of the life tenant. For example, if Grandmother was the life tenant and transferred a remainder interest undto her Granddaughter, the remainderman, for capital gains tax purposes the property would be valued at the date of Grandmother’s death rather than the date that Grandmother bought the house, resulting in usually substantially less capital gains taxes when the Grandaughter goes to sell the home.

Providing a home for the life tenant till they pass away. Property ownership can be secured for the foreseeable future via life estate deeds, which do not require the owner to abandon the property before their death.

Drawbacks of a Life Estate Deed

There are a few things to keep in mind.

Federal Gift Taxes with Life Estate Deeds. The remainderman may need to claim the life estate property as a gift subject to federal gift tax in situations where the annual federal gift exemption is lower than the value of the remainder interest in the property transferred to the remainderman. In some instances, this federal gift tax can be counteracted against the fact that the life estate property is not subject to the estate taxes.

Capital gains taxes for remainderman if life tenant sells property while still alive. In instances of a life tenant without full powers, should the life tenant desire to sell the property while still alive, the life tenant would need consent by all remaindermen and the remaindermen may be subject to a propriation of the capital gains taxes.

Problems with financing. If the life tenant wishes to mortgage the property, depending on the particular situation, some lenders may require consent of all remaindermen or require a new deed be drafed and recorded removing the remaindermen interest(s) and requiring the life tenant to title themselves fee simple absolute interest in the property prior to the lender agreeing to provide financing on the property.

Changing your mind. It is important to remember that once a life estate is created and the life tenant and remainderman/men are appointed, in instances where the life tenant does not have full powers, they can not change their mind and take back the remainderman/men interest(s) without the agreement and consent of all remaindermen.

Possible Medicaid benefits and consequences. One of the requirements for utilizing Medicaid is that you must show limited ownership or interest in real property under the Medicaid requirements. Having ownership interest in or obtaining funds through the proceeds of a home or real property sale may disqualify you; however, if you set up a life estate, your interest in the home or real property may not count against you in your Medicaid eligibility, with one major exception. If your life estate is set up within five (5) years before you applied to receive medicaid, the transfer might be rejected and you could lose eligibility for Medicaid. For this reason, if you are thinking about setting up a life estate, it is better to do it sooner rather than later.

Conclusion. In conclusion there are both pros and cons to creating a life estate. Whether or not a life estate is advantageous and the right choice for you depends on your particular circumstances. Contact CDeeds LLC by visiting our website www.cdeeds.com or by calling us today at 410-919-9681 to speak with one of our experienced real estate attorneys to help you decide whether a life estate is the right choice for you.