Defective Life Estate

[solomon]

Parent wishing to pass residence to children but maintain a life estate. Which in general is better and why - Defective Life Estate or regular Life Estate? Also, is an Intentional Defective Irrevocable Trust the same as a Defective Life Estate. Thanks.

[veritas]

I have not heard of "defective life estate". But I think it is a poor vehicle to use to transfer assets at death.

[solomon]

Why

Why is it a poor vehicle - if you have not heard of it. Regarding keeping a residence out of probate and if possible to avoid estate tax as the residence is worth in excess of three million.

[veritas]

How would it avoid estate tax?

[solomon]

It Doesn't

That is the problem. I gather an IDIT would do that but probably not the thing when this is just for a residence. Given the residence were under two million and no estate tax problem, then what would be the alternative to a life estate or a defective life estate?

[veritas]

The problem with a life estate is it a completed gift at fair market value. No step up in basis at death and no Sec.121 exclusion.

I did a search and could not find any reference to a "defective life estate".

[solomon]

Defective

A defective life estate is not a completed gift until donor dies and it does get a step up basis.

[Jan]

title

If a taxpayer wants the Estate to avoid Probate and still have the beneficiary get, the step-up base on the property (taxpayer home). What is the best way to hold title to there home?

[veritas]

Living trust possibly.

[solomon]

Quitclaim

Quitclaim the residence and retain a life estate - remainderman does get step up on date of death of the life estate retainer.

[jainen]

this kind of nonsense

>>What is the best way to hold title to their home?<<

Solomon, you are asking a legal question on a tax forum. An intentionally defective irrevocable trust is intended to look like an incomplete gift under federal tax laws but a completed gift under state inheritance laws. Whether that is appropriate for a particular family depends on a lot of things other than tax law. So talk to a local attorney who specializes in estates and trusts, and stop reading those magazines that push this kind of nonsense.

[solomon]

No Nonsense

The Code does cover estates. A defective life estate is not an idit.

[solomon]

Jan

Regarding your question on best way to pass on a house to a child. What is known as the Enhanced Life Estate Deed is a good way. The remainderman gets step up basis. It also does not have some of the pitfalls of doing this with a quitclaim deed - for example, with a quitclaim one has to get beneficary approval to sell the property. Retainee of Enchanced Life Estate can also sell the property without beneficiary approval and get a Sec. 121 exclusion if desired. Other good things. Problem it is only availabe in a few states - one of which is Texas - that it is why it is also called the Lady Bird Deed. President Johnson utilized this approach and that is why it picked his wife's name as a nickname for it. I believe Florida and Kansas also use it - perhaps a few more states. You can check to see if you are in a state that approves. As mentioned, it is a incomplete gift until retainee's death thus giving step up to beneficiary. It also, one of your concerns, avoids probate.

[veritas]

A defective life estate is not a completed gift until donor dies and it does get a step up basis.

I have been told differing opinions on stepped up basis.


How about Sec 121 exclusion?