Life Estate on Home Could Lead to Gift Tax
Ask the Real Estate Lawyer: Real Estate Law Q&A
REM #LAW 709
By Ilyce R. Glink and Samuel J. Tamkin
Summary: A reader lives in a home that her
brother inherited from their parents. They are trying to figure out how to give
her "life estate" without having to incur a gift tax. Ilyce and Sam
suggest that an estate attorney could figure out several ways to transfer the
property without triggering a gift tax.
Q: When my parents got old, I moved into their house to take care of them.
When they died, my brother inherited the house. He said I could continue living
there until I died as long as I paid the taxes and maintained it.
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But he would not give me a "life estate" because he said he would
have to pay gift taxes. When I die the house is his to sell or whatever. Why
does he have to pay gift taxes?
The house is in Vermont and the Vermont Department of Taxes says I have to
be taxed at the non-resident rate because he will not change the deed to include
me as a having a life estate interest.
A: You’ve asked a good question. As a little background, when someone
receives a life estate in a home, that home is theirs for all practical purposes.
They have the right to use the home and, in many cases, do as they wish with
the property as long as they live. The only thing the person can’t do
with a life estate is sell the home or transfer the home to someone upon the
death of the life estate holder.
I would suggest you talk to an estate planner to figure out a way to get you
the life estate. Your brother might be right with respect to the tax consequences
of the life estate gift in the home. His issue is not with the Vermont Department
of Taxes; his issue is with Uncle Sam. If you give someone a gift in any given
year of more than $12,000, the IRS requires certain forms to be completed and
it triggers certain tax rules.
Your brother seems to want to avoid this issue. The estate planning attorney
might have some ideas as to what can be done to get you the life estate and
give him (or his estate) the home upon your death. There are many ways of transferring
title of the home to you as a life estate while not triggering the tax consequences.
Some of these issues can be addressed if title to the home hasn’t yet
changed hands from your parents to your brother.
You and your brother need to talk with an estate planning attorney to work
through all the issues. If you don’t know a good estate planning attorney,
contact your local bar association for a referral.
Samuel J. Tamkin is a Chicago-based real estate attorney. Ilyce
R. Glink’s latest book is 50 Simple Steps You Can Take To Sell Your
Home Faster and For More Money In Any Market. If you have questions for
them, write: Real Estate Matters Syndicate, PO Box 366, Glencoe, IL 60022
or contact them through Ilyce’s website www.thinkglink.com