The short answer is a life estate deed separates ownership of real property between two different parties. Often, but not always, the parties are the parents or one parent, and a child or more than one child, and sometimes grandchildren. One party gets life time use of the property and the other receives the property immediately at death of the life tenant effectively bypassing probate.
Life estates can be effective planning tools for several purposes including Medicaid. However there are strict Medicaid rules for transferring any assets or interests. The five-year-look-back period and transfers for fair market value rules apply. When a parent buys a life estate interest in a child’s home there is a one year from date of purchase requirement for the senior to actually live in the home and the parent must also pay the fair market value for the life estate as established by DHHS life expectancy regulations. This is not the same life expectancy percentages as used by the IRS for tax purposes. The entire value of the life estate is included in the donor or transferor’s estate for IRS tax purposes, but is not listed on the short form Inventory for South Carolina probate purposes and is not subject to the donor’s creditors at death.
The life tenant can retain a homestead and residential tax exemption. The life tenant is responsible for all taxes and upkeep on the premises. The life tenant can rent the property and receive the rents therefrom. Rules regarding timber cutting and distribution of the funds on real property held in a life estate is beyond the scope of this brief explanation.
There can be draw backs when the bulk of a person’s estate passes to non-probate beneficiaries as in the case of a remainderman of a life estate. One problem is lack of liquidity to pay decedent’s debts which can force the sale of other probate assets. A second problem can occur if a named remainderman dies before the donor. The donor or life-tenant could have created unintended beneficiaries, resulting in assets passing outside the family to an in-law. Additionally, there could be minor or incompetent beneficiaries as remaindermen that require court approval to sell. Thirdly, there is loss of control for the donor to easily use the real property for an equity line of credit or for reverse mortgage purposes.
A life estate should be part of a well-crafted estate plan where all potential issues such as health of the parties, their financial situations, marital stability and loyalty are explored with the donor(s) prior to conveyance, because once created the remainderman does not have to give back the gift.
Some states allow something called the enhanced life estate deed or Lady Bird Deed, named in honor of First Lady, Lady Bird Johnson. The Lady Bird Deed not only has transfer on death provisions built in but allows the life tenant to sell the property without notifying the remaindermen, (which normally is not allowed) and if the life tenant does not sell before he or she passes then the house or real property will go directly to the named remaindermen without going through probate. South Carolina does not recognize the Lady Bird Deed. Texas, Ohio, Florida and Kansas and several other states now accept this form of conveyance.
Disclaimer: Information contained in this column is meant to be of general information on frequently asked questions regarding disability, elder law, estate planning and probate law, and is not specific legal advice to a client. No attorney-client relationship is created by reading this column.