One of the more frequent estate planning conversations we hear centers upon the transfer of real estate from a person to his-or-her heirs (usually children). This is the fifth and final post in a series of posts reviewing some general information on doing that. As we are typically talking about “the house”, this post will refer to “your house”, but everything here applies to any real estate.
In the previous posts we have considered what happens to property that you own with others (“concurrent interests” if you like fancy-shmancy legalisms), and we talked about leaving property to others through your will (called a “devise”), a trust, what happens if you have no will or trust, and ‘traditional’ life estates.
This brings us to a consideration of the Enhanced Life Estate. To explain this we are going to contrast it with the ‘traditional’ life estate, so reading the previous post might be helpful.
Enhanced Life Estate Deed. With an Enhanced Life Estate Deed, you could transfer the remainder to your child or to a trust that would permit greater control of the property after your death. The Enhanced Life Estate Deed is something of an innovation, a specially designed instrument that is only available in certain states, including North Carolina. It is similar to a traditional Life Estate Deed in that it is a deed that conveys property to another (called a remainderman) at death (of the life tenant). The difference is that while with the traditional life estate (WARNING: LEGALSPEAK COMING) the remainderman’s interest is vested when the deed is signed, with the ELE deed it is NOT vested until you die. In English: with the ELE your child doesn’t have anything until you die. You retain the right to change your mind. That’s right. Without your child’s consent, you can take the property back and give it to someone else. In addition, you have the right to sell or mortgage the property and keep all of the proceeds without your child’s consent. And there are no present tax implications (the IRS calls it an “incomplete gift”).
Just as with a traditional life estate, the remainderman can be one person, multiple people (in equal or unequal shares), or a trust.
• There is no probate (with respect to the property) when you die.
• The transfer will be clear of many of the creditor problems you may develop in the future; but if you are having trouble with creditors when you make the transfer it may not protect the house from them.
• This type of transfer will not disqualify you for Medicaid (because it is an incomplete gift).
• You do not have to file a gift tax return (because it is an incomplete gift).
• The Remainderman receives a step-up in basis.
• Mortgage company approval is not required.
• Condo association approval should not be required.
• As of TODAY the property would not be available for estate recovery if you die on Medicaid. (We cannot guarantee that the law won’t change in the future. See below)
• DMA hates these things. They have not managed to get rid of them in NC yet, but the day is probably coming. This means that if time is on your side (you have the 60 months) a trust is probably a preferable alternative.
• While your child does not have a vested interest, if your child has any income tax liens or judgment liens, they may have to be paid off before you could sell the property. There are differences of opinion on this point. Until there are court decisions resolving these issues, we must assume that the liens might have to be cleared. Many attorneys (myself included) take the position that if you can sell your property without the signature of your child, then why should you have to pay off the child’s lien in order to sell your property. If you believe that this could be an issue, you should consider the use of an irrevocable trust to serve as remainderman.
• If your child dies before you, the remainder interest goes to her or his heirs. If you are still living and have capacity to sign another deed, this can be remedied. But there is the risk that you would not be. If you anticipate that this could be an issue (e.g., “family land”), you could establish an irrevocable trust to serve as remainderman.
In conclusion, the Enhanced Life Estate Deed is an incredible tool for avoiding probate with minimal downside when compared to the non-trust alternatives, but like most such things should not be done without careful consideration of how it fits with your particular situation and goals.
QPRT. Finally, as an unexpected bonus—at no additional charge, a quick word about QPRTs. While not common in NC, they can be used here. And we have clients that come from areas where they had had past dealings with these critters. We may do a more in-depth look at these in a later post, but now a brief word.
QPRT is an acronym for Qualified Personal Residence Trust. While this could be used for Medicaid planning, its original and still most common use is for estate tax planning. If structured properly, the QPRT will freeze the value of your residence at the time you create the trust and therefore result in significant estate tax savings (because the future appreciation of the home is removed from your taxable estate). This is helpful assuming, of course, that estate tax liability is an issue and that the home will continue to appreciate. It is used much more in the Northeast, where not only are house values often considerably higher than here, but many states also impose their own estate tax in addition to the federal tax, and so the impact of the value of the house is more of an issue than here.
The method: you establish a properly-drafted QPRT and transfer your house to the trust. The Trust gives you an unqualified right to possession of the house for a set period of time (the trust term). Then comes the rub: at the end of the term you must relinquish the house (to the kids). It may be worth it, but you want to proceed cautiously after thorough analysis. The decision requires balancing the potential estate tax savings, based in part on current interest rates and the effect of the projected appreciation of the property on your overall estate, against both the consequences of relinquishing ownership to the next generation and the costs involved. The accounting may not be simple. Careful consideration should be given to both tax and non-tax consequences.
As always, this conversation is of a general nature and is NOT A SUBSTITUTE for coming in and discussing YOUR PARTICULAR SITUATION with us. We will offer you coffee, and we rarely bite. You might see a cat. Also, this conversation is based on North Carolina law at the time it was written, and assumes that both you and the real estate in question are in North Carolina.