Life Estate & rent

[Bill Tubbs]

Client's mother has deeded her house to him with a life estate recorded. If mother ends up going to a nursing home (presumably for a temporary visit, which may last months), and the property gets rented out, whose rental income would it be?

If she should die while the life estate is valid, the son is considered to have inherited the property, and his basis is therefore FMV at DOD. Would renting out the property (I think it's to a relative or close friend) while she's temporarily at the nursing home adversely affect this?

Bill

[George Boutwell]

I heard she's not going to a nursing home, she's going to one of those parlors where they tattoo "STUPID" on your forehead.

But the rental income belongs (and is taxable) to the life tenant during her lifetime, then to the remainderman when he becomes the owner.

[Gretel]

I heard she's not going to a nursing home, she's going to one of those parlors where they tattoo "STUPID" on your forehead.

George, maybe I am stupid too, but would you please spell this out for me?

[Jesse]

I would agree with George that the rental income is taxable to the life tenant during her lifetime, then to the remainderman when he becomes the owner.

Renting out the property while she's temporarily at the nursing home should not affect the fact that the son is considered to have inherited the property upon the death of his mother, and his basis therefore would still be FMV at DOD.

This is my opinion - I have not researched any cases.

[George Boutwell]

To Spell It Out

George, maybe I am stupid too, but would you please spell this out for me?

Transferring a remainder interest in your home while keeping a life estate is S-T-U-P-I-D.

If the home is sold, most of the proceeds will go to the remainderman, who will not qualify for a Section 121 exclusion. (He can deed it back to the life tenant, but does she meet the two-year ownership requirement?)

Then there is the question of what happens if the remainderman does not outlive the life tenant. The remainder becomes part of his estate. Does it go to his widow? Does she then pass it on to her second husband?

Or let's just say the remainderman gets divorced, or files bankruptcy. What happens to the value of this "asset" ? Of course if the life tenant is Mom, she knows that bad things will never happen to her sonny boy.

I-D-I-O-T-S.

[Gretel]

Thanks, George. As you figured by now I do not have much experience in this area but kind of understand your point.

If I understand correctly then it never makes any sense to deed the house to a child or any other person for that matter. What do you suggest? Setting up a trust that sets conditions for divorce, death and other life challenges?

[George Boutwell]

What do you suggest? Setting up a trust that sets conditions for divorce, death and other life challenges?

See my forthcoming book (to be published as soon as I get around to writing it) called "How To Avoid Living Trusts." It tells how generations of our English and American ancestors fought and died for the privilege of leaving property to their survivors using an ingenious legal document . . . . well, if I told you what it was, you might not buy the book. Let's just say that some day, I WILL.

What I would suggest, meanwhile, is that people who go out of their way to avoid lawyers and legal advice, actually seek some professional help, based on their individual situation and their state's laws, concerning what is appropriate and needed. If the lawyer suggests a life-tenancy deed, though, go find another one.

[Kram BergGold]

George, It depends

George, it seems you are not making jokes about life estates but stating as a fact that they are never to be utilized. Well life is not that simple. While no plan is perfect, life estates can work wonders. A reasonable person has to look at all the options, each with their own set of liabilities and then decide which option is right for their situation. Therefore, when thinking about elder planning as with all planing the correct asnswer is "it depends".

[OldJack]

I agree with Kram and I have seen outstanding results with proper use of the Revocable Living Trusts. I have also see family disaster with "will" documents where the court and attorney's benefited as much as the beneficiaries.

Does anyone remember about a year ago the man on TV news that emptied his gun on the attorney as they ducked back and forth with a tree between them?

[George Boutwell]

Speaking of Trusts

Does anyone remember about a year ago the man on TV news that emptied his gun on the attorney as they ducked back and forth with a tree between them?

It was more than three years ago, and the shooter was involved in a dispute in which he alleged that a trustee of his trust fund was withholding money needed for medical care.

Meanwhile, feel free to share your views on the Section 121 eligibility of a home sold by a life tenant and an owner of the remainder interest.

[solomon]

Given

"Meanwhile, feel free to share your views on the Section 121 eligibility of a home sold by a life tenant and an owner of the remainder interest"

there were no conflict with state law and assuming the life estate holder met the exclusion requirements, Sec. 121 would apply to the portion (determined from Sec. 7520) of the life estate holder on the date of sale.

[George Boutwell]

assuming the life estate holder met the exclusion requirements, Sec. 121 would apply to the portion (determined from Sec. 7520) of the life estate holder on the date of sale.

But the remainderman (unless the home is also his primary residence) pays tax on his share of the capital gain -- which could be two thirds of the total, if the life tenant was 80 years old when she deeded it to him.

[OldJack]

Sec. 7520. Valuation tables

-STATUTE-
(a) General rule
For purposes of this title, the value of any annuity, any
interest for life or a term of years, or any remainder or
reversionary interest shall be determined -
(1) under tables prescribed by the Secretary, and
(2) by using an interest rate (rounded to the nearest 2/10ths
of 1 percent) equal to 120 percent of the Federal midterm rate in
effect under section 1274(d)(1) for the month in which the
valuation date falls.

If an income, estate, or gift tax charitable contribution is
allowable for any part of the property transferred, the taxpayer
may elect to use such Federal midterm rate for either of the 2
months preceding the month in which the valuation date falls for
purposes of paragraph (2). In the case of transfers of more than 1
interest in the same property with respect to which the taxpayer
may use the same rate under paragraph (2), the taxpayer shall use
the same rate with respect to each such interest.
(b) Section not to apply for certain purposes
This section shall not apply for purposes of part I of subchapter
D of chapter 1 or any other provision specified in regulations.
(c) Tables
(1) In general
The tables prescribed by the Secretary for purposes of
subsection (a) shall contain valuation factors for a series of
interest rate categories.
(2) Initial table
Not later than the day 3 months after the date of the enactment
of this section, the Secretary shall prescribe initial tables for
purposes of subsection (a). Such tables may be based on the same
mortality experience as used for purposes of section 2031 on the
date of the enactment of this section.
(3) Revision for recent mortality charges
Not later than December 31, 1989, the Secretary shall revise
the initial tables prescribed for purposes of subsection (a) to
take into account the most recent mortality experience available
as of the time of such revision. Such tables shall be revised not
less frequently than once each 10 years thereafter to take into
account the most recent mortality experience available as of the
time of the revision.
(d) Valuation date
For purposes of this section, the term "valuation date" means the
date as of which the valuation is made.
(e) Tables to include formulas
For purposes of this section, the term "tables" includes
formulas.

[George Boutwell]

Bugs on a page

Yup, that's the kind of mess you start getting yourself into when you give away your property and retain a life estate.

[solomon]

Granted

if there is a realistic chance the Grantor might sell the house, then it is not the most wise vehicle to use. On the other hand, it is not complicated to look at the tables in Pub. 1457 to compute the gain to the remainderman should that occur.

I personally used an Enhanced Life Estate Deed (also known as a Lady Bird Deed) to do this because there is no chance I will sell my home. I used TOD's and POD's and the Lady Bird Deed because I wanted to avoid probate for my son. The only expense was a filing fee as I created the deed myself - lot cheaper than lawyer, trust, and probate.