A life estate deed is a type of deed.  You give yourself a life estate interest in your home [1] and retain the right to live in, use, and enjoy the property during your lifetime.  Then, you name a beneficiary who will receive the property upon your death without having to go through the probate process.  The person who retains the life estate is called the life tenant, and the person who receives the property after the life tenant dies is called the remainderman.  This remainderman automatically inherits the property and remains on the deed at your death.  You may name more than one person to receive the property but you must be careful how you designate their ownership, either as tenants in common or as joint tenants.

There are two different types of life estate deeds used in Maryland.  The first is called a life estate deed with full powers.  This type of deed is often used in the estate planning context.  The purpose of a life estate deed with full powers is to avoid probate.  Retaining full powers allows you, the life tenant, the power to sell, mortgage, or reconvey the property to someone else without notifying the remainderman.  You retain all the same powers that you had prior to creating the life estate deed with full powers.  The consent of the remainderman is not needed if you want to change the deed.

The second type of a life estate deed is a life estate deed without powers.  This type of deed is often used in conjunction with Medicaid[2] Planning.  When you create this type of deed, you are giving up the exclusive power to sell, mortgage, or reconvey the property to others.  You need the consent of the remainderman if you want to sell your house.  For Medicaid purposes, this type of deed is considered a gift and the gift penalty rules apply.  The advantage of this type of deed is that after five years[3] the gift penalty period for Medicaid expires and the value of the life estate is not currently considered a countable asset for Medicaid purposes.

When you create a life estate deed without powers, a gift tax return is not required to be filed with the IRS.  However, if you decide to sell the property then capital gains taxes will need to be allocated between the life tenant and the remainderman.  For example, if the remainderman is your child and your child does not live in the house, then h/she will not be able to claim a capital gains exclusion for the gain on his/her share of the property.  The value of the life estate and the remainderman is determined by the actuarial life expectancy of each person.  Therefore, you need to carefully consider whether or not a sale of the property will occur before you die.

It is very important that you and your remainderman both create a Durable Property Power of Attorney[4].  If either of you becomes incapacitated and the property needs to be sold, then you need this document so that someone else can sign your name.   A life estate deed without powers can be transferred back to you exclusively; however, the remainderman must agree to sign a deed transferring the property back to you.  This is why you want your remainderman to have a current Property Power of Attorney.

Creating a life estate deed has advantages and disadvantages depending on your situation.  It is not a one-size-fits-all approach.  You must carefully consider the legal consequences of changing the title of your home.  Your home is usually your largest asset and you should talk to an attorney before creating a life estate deed.  At SinclairProsser Law, LLC, we are experienced estate planning attorneys.

[1] Home and property are used interchangeably in this Article.

[2] Medicaid is a federal program administered by the States that pays for a long term care stay in a nursing home.

[3] The current look back period for long term care Medicaid is five years.

[4] A Durable Property Power of Attorney is a legal document where you name a person to step into your shoes and handle your financial transactions for you if you are unable to do so yourself.

SinclairProsser Law, LLC is a member of the American Academy of Estate Planning Attorneys.

Listen to Attorney Nicole Livingston discuss the use of a Life Estate Deed as a valuable tool in estate planning and Medicaid planning.

Life Estate Deeds by Nicole Livingston

SinclairProsser Law, LLC is a member of the American Academy of Estate Planning Attorneys.

Estate planning is very beneficial because it allows you to plan for multiple needs.  It’s important to think about your own personal needs as well as the needs of your loved ones.  If you’re just getting started with your planning, take a look at the following information.  If you have any questions about how certain estate planning tools work, meet with an estate planning attorney.

Do you have a family to protect?

Consider the future of your entire family.  Make sure that you’re able to protect your children so a responsible adult, of your choosing, is always caring for them.  In addition, consider your family’s future needs and expenses.  If you’re unable to provide income, you need savings, disability insurance, and life insurance in place, as applicable.

Are you looking to protect your own future?

You need to prepare for your own future with an estate plan.  Consider protecting yourself during possible illness and disability with powers of attorney, a revocable living trust, and insurances.  Be sure to research insurance options, such as disability insurance, life insurance, and long term care insurance.  Prepare for future retirement costs.

Do you want to make a difference in the lives of others?

You may have other planning goals that don’t relate to you or your family.   Consider giving back to your school or a favorite charity.  You may also consider gifting to others who have made a difference in your life.  There are many ways in which you make a difference in the lives of others.  Financial gifts, letters of appreciation, gifts of experience, and sentimental gifts are all appropriate for loved ones and good friends and neighbors.

Take the time to think about all of your estate planning needs and goals.  If you’re ready to commit to comprehensive estate planning, consult with a qualified estate planning attorney.

SinclairProsser Law, LLC is a member of the American Academy of Estate Planning Attorneys.

We all need a reminder once in awhile that estate planning is NOT just about the money.  Often our clients ask how they should gift to their loved ones.  We commonly set up trusts for charities, children, and grandchildren.

In addition to passing along dollars, we emphasize the value of gifting an experience.  For example, while you are alive and well, fund a trip to Yosemite National Park, Santa Barbara, or the Grand Canyon.  Or treat your family to a musical or theatrical production and introduce them to your love of the performing arts.

In our years of estate planning, we’ve found that memories and experiences are highly treasured.  In fact, they are more highly treasured then the passage of dollar bills.

Other gifting ideas, which you are free to adopt or adapt, include:

• Paying for a grandchild’s college tuition or setting up a 529 Plan for college savings
• Passing along a treasured family heirloom that has special meaning and memories to a loved one
• Having tea every thanksgiving using a treasured tea set brought over on the Mayflower
• Paying for a personal development course for your daughter-in-law
• Taking the family to a mountain retreat for a week

So long as you give with an open heart and no regrets, there are no wrong ways to gift.  If you wish to gift significant sums of money or wish to retain a family vacation home for the next generation, consult with a qualified estate planning attorney for guidance.  That is not a road to travel alone.

Gifting into a trust is likely the best alternative.  Trusts provide instructions as well as asset protection.  Asset protection means that the family vacation home can’t be lost if one of your children or grandchildren gets divorced, goes bankrupt, or is otherwise sued.

SinclairProsser Law, LLC is a member of the American Academy of Estate Planning Attorneys.

When you put your estate planning in place you took some valuable steps to protect your family from guardianship, probate and/or estate taxes.  The current system of estate taxation in Maryland taxes estates in excess of $1,000,000 for a single person.  For a married couple with a living trust, $2,000,000 would be exempt.

Do you want to take additional steps to reduce or eliminate estate taxes?  Here are a couple of examples:

Gifting. You can transfer $13,000 per year to any person.  It is very simple and very easy.  If you would like to gift more than $13,000, then you will need to file a gift tax return and the amount in excess of the $13,000 will reduce your Federal estate tax exemption, currently $5,000,000.  However, since Maryland does not have a gift tax, your Maryland estate tax exemption will remain at $1,000,000.  There are also exemptions for gifts to pay educational and medical expenses.

Irrevocable Life Insurance Trusts (also commonly referred to as an ILIT “eye lit”).  You can transfer your life insurance policies to an irrevocable trust and exempt the proceeds from your estate.  You may also want to buy a life insurance policy and place it in the ILIT to create a source of cash to pay final expenses and estate taxes upon your death.  If you purchase the policy and you do not put it in an ILIT, then you are increasing your estate for greater taxation at your death.

Qualified Personal Residence Trust (also known as a QPRT “queue pert”).  This irrevocable trust allows you to place your home and/or a second home in a trust and exempt the value of your home from your estate.

Grantor Retained Annuity Trust (also known as a GRAT).  This is also an irrevocable trust that can be used to remove future appreciation of an asset from your taxable estate.  You would gift an asset or assets to the trust, receive a stream of income for a period of time, and at the end of the term of the trust the principal is distributed to the beneficiaries of the trust, most likely your children or grandchildren.  The success of the GRAT depends on the performance of the asset(s) gifted to the GRAT.

Family Limited Liability Company. This tax reduction strategy allows you to gift small portions of an asset to family members without having to break apart the asset.  Real estate or businesses are good examples of the type of asset best suited for a Family Limited Liability Company.

As with all tax reducing strategies, there are many technical issues that you will want to be aware of before implementing one of these plans.  It is important that you meet with a qualified estate planning attorney to discuss which options are best for you and your family.

SinclairProsser Law, LLC is a member of the American Academy of Estate Planning Attorneys.

Hollywood legend Elizabeth Taylor will be remembered for many things: her stunning violet eyes, her multiple marriages, her film accomplishments, and the success of her perfume and jewelry businesses. But Ms. Taylor may be remembered most of all for her philanthropy, especially relating to the fight to find a cure for AIDS and to end discrimination against those afflicted.

Much of the Oscar-winning actress’ wealth, which could top $1 billion, is expected to be distributed to charities, including the three charitable foundations she helped create – the National AIDS Research Foundation, the American Foundation for AIDS Research, better known as “AMFAR,” and the Elizabeth Taylor AIDS Foundation. Many commentators expect the bulk of the proceeds from the auction of her jewelry collection, expected to top $150 million, to go directly to these three charitable organizations. Most commentators speculate that the residual of her trust assets will be distributed among her four children and many grandchildren, with whom she had good relations.

The exact terms of Taylor’s estate plan are unknown because she used a trust as her primary estate planning document, rather than a Will. Because a Will requires a probate administration, its terms become public record. Many people prefer to use trusts as their primary estate planning document because of the privacy it offers by avoiding the probate process.

Taylor’s AIDS work saw her address the General Assembly at the United Nations. She was a huge supporter of Ryan White, the 18-year-old who died of the disease in 1990 after attracting a frenzy of media attention when he was expelled from his middle school because of the disease, which he contracted from a blood treatment for his hemophilia. At a time when AIDS was poorly understood by the world, Ryan helped reduce stigma and raise awareness. Over the last twenty years, Ms. Taylor worked tirelessly to fundraise and reduce the stigma that surrounds AIDS, and was honored by a plethora of organizations that recognized her commitment to the cause. She was presented with the Jean Hersholt Humanitarian Award by the Academy of Motion Picture Arts and Sciences (“AMPAS”), the Marion Anderson Award, the Vanguard Award by the Gay and Lesbian Alliance Against Defamation (“GLAAD”), and she was honored by the Women’s Image Network. Other honors she received include the French Legion of Honor, the Presidential Citizens Medal, and being made Dame Commander of the Order of the British Empire.

The portion of Taylor’s estate paid to charity will NOT be subject to estate tax. Any portion of her estate over the amount that can pass free of estate tax, currently $5 million, may be distributed to her children and grandchildren and will be subject to estate tax and possibly GST tax. Given the size of her estate, the estate tax could be in the millions of dollars.

For persons who are charitably inclined like Elizabeth Taylor, there are various planning strategies available that both reduce estate and GST taxes and provide funds to worthwhile causes. Outright gifts to charity, both during life and at death, reduce the estate by the amount gifted to the charity. Depending on the law at the time of the death of the donor, the amount of estate taxes saved may be as much as 55% of the amount given to the charities. If the individual wants to retain some control regarding how the funds are to be used, he or she can make a gift to a donor advised fund at an established charitable organization. Even greater control can be retained over the use of the funds through the establishment of a charitable foundation by the donor, either during life (as Elizabeth Taylor did) or upon the donor’s death.

Two additional planning options, a charitable gift annuity and a charitable remainder trust, allow the donor to gift money or property to a charity while retaining a stream of payments for a term of years (not to exceed twenty years) or the life or lives of one or more individuals. The value of the charitable gift (and thus the amount of the charitable deduction for income and estate tax purposes) using these planning options is the present value of the remainder gift to the charity. The payment stream retained by the donor remains a part of the donor’s estate, unless expended during the donor’s lifetime.

Another planning strategy, a charitable lead trust, is basically the opposite of a charitable remainder trust. Payments are made to the charity for a period of years, with the remainder at the end of that period passing to designated beneficiaries, usually the children of the donor. The value of the charitable gift using this planning option is the present value of the payment stream made to the charity.

In certain circumstances, it may be appropriate to combine the use of these various charitable planning strategies with the purchase of a life insurance policy through an irrevocable life insurance trust. This wealth replacement strategy allows the amount of the death benefit from the life insurance to be paid income and estate tax-free to the designated beneficiaries, usually children and grandchildren of the donor, as a substitute for the funds that were given to the charity.

SinclairProsser Law, LLC is a member of the American Academy of Estate Planning Attorneys.