| Dear Mr. Premack: My mother is
widowed and has only her home. We’d like to make things simple after her
demise. Have you ever heard of a life estate? What is it and how does it
work? Can one of the two siblings to whom the property was left sell
the home without the other’s signature? Thanks for your answers. – RP
"Life estate" is an ownership arrangement for land. A deed is created
in which the current owner conveys partial ownership to someone else. That
partial ownership is called a "remainder interest," and the current owner
keeps the "life estate."
The life estate entitles the current owner to several things. First,
she continues to occupy and use the property. Second, she gets all money
that may come from the property – be it rental income or sales proceeds.
Finally, the property is still legally her homestead under Texas law, so
her property taxes do not increase.
Since using a life estate arrangement does not have a dramatic effect
on the current owner, the main reason to use one is to create the
remainder interest. When the current owner dies, her life estate expires
and the remainder interest blossoms into full "fee simple" title – that
is, full and unrestricted ownership. The change in ownership happens by
operation of law, and does not require any legal process like probate.
Creating a life estate arrangement requires the assistance of an
attorney. A deed with proper terminology is written, signed by the current
owner, and is recorded at the courthouse. The transfer is a gift of a
portion of the home’s value, so the owner must be careful not to become
entangled with gift tax complications.
The IRS publishes a table that is used to calculate the value of the
gift, which is determined by the owner’s age and the home’s value. For
instance, if the home is worth $100,000 and your mother is 80 years old,
IRS "Table S" tells us to use a factor of " .59048" to value the gift.
Multiply the $100,000 times .59048 to get $59.048, which is the value of
the remainder interest. The older the current owner is, the higher the
value of the gift is.
Whenever the value of a gift exceeds $10,000 to a single person in a
year, a gift tax return must be filed with the IRS. Your mother will not
actually pay any gift tax though, because the house is her only asset.
Federal law allows her to gift up to $675,000 during her lifetime (or upon
her death) without paying any gift or estate tax.
You also ask if you and your sibling could sell the house without the
other’s signature. The answer is different depending on the timing. First,
while your mother is alive, all three of you must sign papers to sell the
house. Second, after your mother has died, both siblings must sign papers
to sell the house. No one person could sell it acting alone. |
