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Deed with Life Estate in NY (Estate Planning Tool)

A deed with a life estate is an estate planning tool with many advantages. The first advantage is a very significant tax advantage. If an elderly person wishes to have certain persons receive their real property upon their death, instead of leaving it in a will, they can transfer the Deed to the beneficiaries, retaining a life estate for themselves. Upon their death, the property automatically goes to the beneficiaries, without having to probate a Will. By reserving a life estate, the grantor need not worry about having to leave the home, since they have the right to stay there for the rest of their lives.

Generally, depending upon the size of the Estate, upon their death, the property is transferred with a stepped-up basis. This means that if the property increased in value (which can be significant), the heirs receive the property with a market value basis, and if the house were sold within six months of the date of death, no capital gains tax would be due. Any increase in value from the date of death would be considered capital gains from that point onward. An accountant should be consulted with any tax ramification questions, whether it be regarding capital gains tax or estate or gift tax questions. The proposed new tax plans usually include the treatment of the stepped-up basis. Hence, an attorney or accountant must be consulted as to whether this applies in your particular circumstance upon the death of the life tenant.

It may be a disadvantage to transfer the property to a life estate if it's expected that the property will be sold prior to the death of the parent. However, properties could always be transferred back to the parent prior to selling, if done sufficiently in advance of going into contract to sell. If a parent retains a life estate, but does not reside in the premises, the stepped-up basis may not be available. However, if the children occupay the premises for the approprite period of time, they should be able to utilize the applicable occupancy exemptions. Further, after you consult with an accountant, it is possible that if the property is transferred outright, without a reserved life estate in the deed, the IRS may still consider that it is a retained life estate if the parent remained in the premises, without paying rent, and other criteria. Hence, the property would be includible in the estate, and the stepped-up basis allowed.

A life estate may also be useful for Medicaid planning, but an attorney should be consulted with respect to this issue, since the laws of Medicaid qualificatin change periodically, and general information cannot be given here.

In addition, subject to verification with your property assessor’s office, it looks like a senior citizen will be able to retain their senior enhanced Star property tax exemption even after transferring the property and retaining a life estate, so long as they reside in the property. However, it does not appear to be the case in the Boroughs of the City of New York.

The above is attorney advertising, and should not be considered legal advice in any State, or the creation of an attorney-client relationship. A licensed attorney in your state should be consulted to answer any of your questions, and before you take any action.

Cynthia M. Burke,