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Not All Life Estates Are Good Ideas
Jan L. Warner & Jan Collins

Question: When my husband died three years ago, he left me our home (which was in his name), plus all of our bank accounts and investments. I am in my late 60’s and have three grown children. Two of them live near me, and the third in Wisconsin. My income is from Social Security and a survivor’s plan from my husband’s pension. I am not wealthy but have been blessed with good health, and I am financially comfortable.

When my children were in for the holidays, I found it strange that several of our conversations turned to what would happen if I had to go to a nursing home. Because this had never come up before, I am convinced that my children had talked about this earlier – when I was not there. But I played along like I didn’t suspect they had planned the conversation.

One said that she had read that all older people should have a durable power of attorney – which I do have. Then my son said he had read that it was a good idea for older people to give away their home to their children but retain the right to live there. In that way, he said, if the older person (I knew he was talking about me) went into a nursing home, the house would not be lost. I want my freedom and don’t want to pay any taxes, but I don’t want to be selfish either. Is it a good idea to do this?

Answer: Under the circumstances you describe, we believe that transferring a “remainder interest” in your personal residence to your children would take away your freedom, not to mention potentially causing difficulties should you become incapacitated, need nursing home care, and try to qualify for Medicaid in the near future.

By transferring a remainder interest, you are making a gift to your children, the value of which will be determined by federal tables. The older you get, the more the remainder interest is worth. For example, if your home is worth $100,000 and the remainder interest is worth 66% ($66,000), you would be making a $22,000 gift to each of your three children. And since the value of the remainder interest exceeds the annual exclusion of $11,000 per child, you will be required to file a gift tax return by April 15 of the year after the transfer. No tax will be due. When you die, your children will automatically receive full title to the home as a “non-probate” asset at a “stepped up” basis equal to the fair market value as of the date of your death.

But by transferring a remainder interest at your age, you will limit your ability to live your life. As the life tenant, you are responsible for repairs, property taxes, maintenance, and related obligations. If, for example, you later want to sell your home and use the equity to purchase a smaller residence, you couldn’t do so without your children signing right along with you. (In this event, each of your children’s shares would be subject to capital gains taxes). And if you want to tap the equity to fix the roof, take a trip, buy a new car, add a room, or do a reverse mortgage and use the resulting cash flow, you will have to convince your three “partners” that they should go along with your plan.

Taking the NextStep: All of your children may tell you today that they will agree to whatever you want to do, but you have no assurances. If one of your children predeceases you, you may well be dealing with your daughter- or son-in-law and grandchildren. And if one of your children has debt problems, bankruptcy courts have been known to value a remainder interest as part of the bankruptcy estate. We believe that you are too young, and have too many potential opportunities, to tie yourself down. Tell your kids “thanks, but no thanks.”

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