FAQs: Life Estate

4 Feb

Q. What is a Life Estate?

A. A “life estate” is an estate whose duration is limited to the life of an individual (usually the party holding the life estate), and a legal arrangement whereby the “life tenant” during his or her life retains use (the rights to rents and profits), possession of the property and costs of maintaining the property. The life tenant cannot sell, take a mortgage against or waste the property without the consent of the owners (known as remainderman in most states) and conversely, the owners cannot sell, mortgage or waste the property without the life tenant’s permission.

Q. How Does One Create a Life Estate?

A. In general to create a legal life estate in real estate property, the property must be conveyed by a deed which carves out the life estate for the grantor and creates a “remainder interest” by which the “remaindermen” receive full ownership immediately upon the death of the life tenant. In New York however, there is no remaindermen, meaning that ownership interest is created immediately in the grantee(s) simultaneously with the life tenant’s interest for the life of the tenant.

Q. What are some Benefits of a Life Estate?

A. The life tenant has the legal right to remain in the house for as long as they live, whereas, if he or she transferred the house outright, the new owner could legally sell or mortgage the property the next day forcing the previous owner (you) to vacate the premises and it is useful for Medicaid eligibility and protection from Medicaid recovery by New York State as shown in the following 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 which she wants to leave to her son. Jane has a progressive illness which renders her ineligible for long term care insurance. Therefore, she may have to apply for Medicaid as her health declines. By drafting a deed which retains a life estate for Jane with the remainder to her son, the following can be accomplished:

a) 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 only $94,785.00. If Jane had simply transferred the house to her son she would not be eligible to receive Medicaid until 60 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 from the date of the execution of the deed;

b) A life estate is a “limited interest in real property”, meaning New York State will not require Jane to sell the property, nor will the state place a lien on the property as a condition of paying a nursing home Medicaid for Jane’s care;

c) Medicaid laws in New York limit recovery to probate assets of the Medicaid recipient or her spouse (in our example Jane is a widow). Since the life estate is extinguished upon Jane’s death, the property passes to her son out of probate and is therefore not recoverable by the state; and

d) Jane remains for purposes of real property tax administration and therefore continues to qualify for the STAR exemption, veteran’s benefits and any other property tax reduction available to the “owner” of the property.

For more, see our FAQ page or follow this link:

http://www.traditionta.com/faq/life-estate-faq/index.html

 

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