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San Antonio Express-News
January 21, 2000

How Does "Life Estate" Work?

© 1989-2004, Paul Premack

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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.

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Disclaimer: This column answers a specific legal question offered by an individual in the South Texas area. The answer may or may not match your individual situation. Be careful not to treat this column as specific legal advice that meets your individual needs. It may give you a solid basis for discussion with your own attorney. Also, please be aware that laws change. You should consult with your personal attorney before you take any action on this or any legal issue.

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