A life estate deed is a type of deed. You give yourself a life estate interest in your home [1] and retain the right to live in, use, and enjoy the property during your lifetime. Then, you name a beneficiary who will receive the property upon your death without having to go through the probate process. The person who retains the life estate is called the life tenant, and the person who receives the property after the life tenant dies is called the remainderman. This remainderman automatically inherits the property and remains on the deed at your death. You may name more than one person to receive the property but you must be careful how you designate their ownership, either as tenants in common or as joint tenants.
There are two different types of life estate deeds used in Maryland. The first is called a life estate deed with full powers. This type of deed is often used in the estate planning context. The purpose of a life estate deed with full powers is to avoid probate. Retaining full powers allows you, the life tenant, the power to sell, mortgage, or reconvey the property to someone else without notifying the remainderman. You retain all the same powers that you had prior to creating the life estate deed with full powers. The consent of the remainderman is not needed if you want to change the deed.
The second type of a life estate deed is a life estate deed without powers. This type of deed is often used in conjunction with Medicaid[2] Planning. When you create this type of deed, you are giving up the exclusive power to sell, mortgage, or reconvey the property to others. You need the consent of the remainderman if you want to sell your house. For Medicaid purposes, this type of deed is considered a gift and the gift penalty rules apply. The advantage of this type of deed is that after five years[3] the gift penalty period for Medicaid expires and the value of the life estate is not currently considered a countable asset for Medicaid purposes.
When you create a life estate deed without powers, a gift tax return is not required to be filed with the IRS. However, if you decide to sell the property then capital gains taxes will need to be allocated between the life tenant and the remainderman. For example, if the remainderman is your child and your child does not live in the house, then h/she will not be able to claim a capital gains exclusion for the gain on his/her share of the property. The value of the life estate and the remainderman is determined by the actuarial life expectancy of each person. Therefore, you need to carefully consider whether or not a sale of the property will occur before you die.
It is very important that you and your remainderman both create a Durable Property Power of Attorney[4]. If either of you becomes incapacitated and the property needs to be sold, then you need this document so that someone else can sign your name. A life estate deed without powers can be transferred back to you exclusively; however, the remainderman must agree to sign a deed transferring the property back to you. This is why you want your remainderman to have a current Property Power of Attorney.
Creating a life estate deed has advantages and disadvantages depending on your situation. It is not a one-size-fits-all approach. You must carefully consider the legal consequences of changing the title of your home. Your home is usually your largest asset and you should talk to an attorney before creating a life estate deed. At Sinclair Prosser Gasior, we are experienced estate planning attorneys.
[1] Home and property are used interchangeably in this Article.
[2] Medicaid is a federal program administered by the States that pays for a long term care stay in a nursing home.
[3] The current look back period for long term care Medicaid is five years.
[4] A Durable Property Power of Attorney is a legal document where you name a person to step into your shoes and handle your financial transactions for you if you are unable to do so yourself.
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