A life estate deed in New York allows an individual, known as the life tenant, to retain the use and enjoyment of their home throughout their lifetime. Upon their death, title to the property passes to another person, known as the remainderman (or woman), without the need to go through probate. This important estate planning tool can be used to avoid probate, reduce assets for Medicaid planning, and minimize estate taxes.

What is a life estate?

A life estate is an estate planning tool that splits ownership of a property between the life estate and the remainder interest. The life tenant or the person holding the life estate has the right to live on the property and enjoy its use throughout their lifespan or the lifespan of another designated person. Once this term ends, the interest in the property automatically transfers to the remainderman (or woman). The person who receives ownership of the property is already predetermined, and the property does not need to go through the probate process.

The life tenant is responsible for taxes, maintenance, and other costs associated with maintaining a property throughout their lifetime.

The remainderman is guaranteed ownership of the property once the life tenant passes. The life tenant cannot sell or transfer ownership of the property to anyone else without the remainderman’s consent.

What are the benefits of a life estate deed?

A life estate deed has several potential benefits:

• Grantors or life tenants who own property and use a life estate deed are assured that they have the right to own and live on their property for the rest of their lives.
• When the life tenant passes, the remainderman will inherit the property. This simplifies the probate process because it is very clear who will inherit the property. Having a life estate deed can speed up the process of transferring assets from one generation to the next, reducing potential costs and conflicts associated with transferring property.
• Life estate deeds can be used as a Medicaid planning strategy. If a life tenant uses a life estate deed to transfer property, they reserve the right to live in the property, and since they split ownership with the remainderman, the property may be an exempt asset or reduce the value of the asset when considering Medicaid eligibility.
• A life estate deed can also decrease capital gains taxes. The value of the property is determined when the life tenant dies. This is considered the cost basis, not the home’s original purchase price. Since appreciation is likely going to be less than if the initial purchase price was used, the remainderman may be responsible for lower capital gain taxes. However, a life estate deed can have an impact on income and estate taxes, as well as eligibility for government benefits. It is important to consult with a tax professional to fully understand the potential tax implications of using a life estate deed.

What are the potential drawbacks of a life estate deed?

While life tenants have the right to enjoy their home throughout their lifespan, they lose the right to sell, mortgage, or transfer the property to someone other than the remainderman without their consent.

If the life tenant has multiple beneficiaries, a life estate deed must clearly define who the life tenant is and who the remainderman is. To reduce potential conflicts, the life estate deed must also designate who is responsible for property maintenance and repair. For example, suppose that the life tenant must enter an assisted living facility. In that case, family members may want to sell the property to reduce property maintenance and other costs, but they will be unable to do so without the consent of the remainderman.

If the remainderman dies before the life tenant, their interest in the house will pass to their beneficiaries if they have a will or whoever inherits the right to the home when the life tenant dies, following intestacy laws. This means that the life tenant cannot work with the remainderman to sell the home. Ownership of their home may pass to someone who the life tenant does not want to have that right.

Other potential situations, such as the remainderman becoming incapacitated, estranged, or sued, can impact the life tenant and their ability to sell the property or be eligible for a loan. Before considering a life estate deed, talk with your estate planning attorney to determine the potential risks and benefits in your situation. In many cases, a trust will better accomplish your goal of living in your home throughout your lifetime and transfer the property to a beneficiary upon your death. A trust is more flexible than a life estate. It can be modified or even revoked throughout the grantor’s lifetime as long as they remain competent to make changes to the trust documents.

If you have questions about transferring wealth across multiple generations or want to learn about how to protect your assets and property with a comprehensive set of estate planning tools, contact us.