Life Estate

[Bjorn]

Facts:
The father has a life estate in the home he has lived in for many years. The client said it was at 22% {whatever that means}.
Father went to nursing home and will not return to his home.
Father's net worth is about 600,000 and falling fast with nursing home bills.

Issue:
Son wants to quit claim deed home to one of the syblings and then rent out the house.
Insurance company is concerned over a home that is not lived in.


Tax Question:
Does this cause capital gains and or gift tax return filing requirements if the kids would sell the house?

What about if the kids turned it into a rental because it may be a soft market to sell a home in?


What would be the best way to handle this situation?
Mahalo,

Bjorn

[solomon]

The tax consequences of the sale would be determined on the date of the sale. IRC 7520 and IRS Pub 1457. The father's portion would be determined by the preceding cites. The balance would be divided among the remaindermen. The father's 22% was probably when he retained the life estate but that figure has no bearing upon his interest when the property is sold. His percentage is based upon IRC 7520 and Pub 1457 on the sale date. The father's portion probably qualifies for the 121 exclusion.

[JG EA]

The 22% is just a number from a table as to the value of the life estate. It is based on age, etc. There is a table on NATP website. It is surprisingly high in my estimation. I looked at one that was 28% for a really old person.

If no sale takes place and the home is rented then all income goes to the benefit of the one holding life estate. So, all income could not be held by the children. And if it is gifted to the children, each state has a number of years before death that this money can be collected back. (5 or so years)

In some states you are allowed to have a caretaker stay in the home to protect against damage, theft, etc.

In some states the life estate portion is even turned over to the state if the person dies and is on Medicaid at the time. (This doesn't seem fair since how can there be a life estate when there is no life.) So, some have looked into gifting a portion of the life estate each year in the amount the law allows.

So, check with an attorney because there are so many variables.