Estate Planning Technique
Creation of Life Use
- A person who transfers his/her property but retains the legal right to remain in property for his/her natural life, is called a “life tenant” or holder of a “life use”. This transfer is IRREVOCABLE.
- A person to whom property is transferred is called the “remainderman”.
- A person who holds a life use is not affected by the actions or liabilities of the remainderman.
- Federal and Connecticut Gift Tax Returns must be filed in most cases; however, there usually is no Federal or Connecticut Gift Tax due.
- A person who has life use will normally continue to pay taxes, insurance, water, and day-to-day maintenance of the property.
- When a person dies owning a life use, the entire value of the property will be included in his/her estate for tax purposes. (This will usually be a substantial tax benefit to the remaindermen (children) if they plan to sell the property after the parent dies, because the children get a “stepped- up basis,” eliminating much , if not all, of the capital gain.)
- If a person who has a life use goes into a convalescent home and must apply for Title XIX/Medicaid, only the value of the life use and not the entire value of the property may be attached by the State after the five-year penalty period. The value of the life use is determined by a mortality table based on the life tenant’s age and the value of the property at the time that the life tenant goes into the convalescent home.
- Once a life use has been created, in order to sell the property to a third party or mortgage the property, the remainderman and the party holding the life use be part of the transaction. If a remainderman dies, his/her interest in the property transfers under his/her Will.
- Life use should usually not be used unless the client is over 65 years old and is reasonably sure he or she doesn’t intend to sell the property and relocate. If the person intends to relocate, it’s probably best to transfer the property into a trust.
The above-mentioned explanation has tax ramifications for Federal and State Estate, Inheritance, Gift, Income, and possible Property Taxes. These comments are of a general nature, and each situation has to be looked at separately. Generally, the creation of a life use is a valid, workable estate planning technique for a person whose Gross Taxable Estate is less than $2,000,000.00. Please consult with one of the attorneys to see if this technique offers benefits to you.