House in Life Estate Tax Implications (Massachusetts)

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Baseballmom94
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House in Life Estate Tax Implications (Massachusetts)

Post by Baseballmom94 »

I have a question regarding the tax implications of the sale of a home in a life estate in Massachusetts, if anyone is familiar with this issue.

My elderly in-laws placed their house in a life estate with their two children on the deed six years ago. They did this in order to preserve the asset value of the house from the government if either of the two parents entered a nursing home and exhausted all of their modest assets (about $300,000 savings plus monthly pension/social security income which covers their basic living expenses). Now my in-laws (age 87 and 96) are planning to move in with their daughter, which will leave the house vacant.

There are two options on what to do with the house at this point but the primary issue is regarding the tax implications of a sale either now or after the passing of both parents. The house value is approximately $500,000. One of the children on the life estate lives in Massachusetts where the house is located and the other child lives in Ohio.

Here are the options:

1) Leave the house in the life estate and rent the house in order to cover taxes (about $5000 per year) and any maintenance needed. Sell the home after the passing of both parents. The net proceeds would be split 50/50 between the two children. What are the tax implications to each of the children? Is it based on the income tax bracket of each child or is it a certain percentage subject to Massachusetts tax law?

2) Remove the house from the life estate and sell the house now. Obviously, now the value of the house is no longer protected from the government if the parents deplete their other liquid assets. What are the tax implications of this?

3) Are there any other options that we are not thinking of? Yes, there is a lawyer involved but just trying to think out of the box and see if there is any other way to sell the house while preserving the proceeds from the house.
Hebell
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Re: House in Life Estate Tax Implications (Massachusetts)

Post by Hebell »

If you do the approach number one, when the parents die, the house will pass to the children and they will get the step up basis at that time. I'd certainly do it that way and take the rent in the interim
mkc
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Re: House in Life Estate Tax Implications (Massachusetts)

Post by mkc »

Baseballmom94 wrote: Tue Feb 23, 2021 8:38 am I have a question regarding the tax implications of the sale of a home in a life estate in Massachusetts, if anyone is familiar with this issue.

My elderly in-laws placed their house in a life estate with their two children on the deed six years ago. They did this in order to preserve the asset value of the house from the government if either of the two parents entered a nursing home and exhausted all of their modest assets (about $300,000 savings plus monthly pension/social security income which covers their basic living expenses). Now my in-laws (age 87 and 96) are planning to move in with their daughter, which will leave the house vacant.

There are two options on what to do with the house at this point but the primary issue is regarding the tax implications of a sale either now or after the passing of both parents. The house value is approximately $500,000. One of the children on the life estate lives in Massachusetts where the house is located and the other child lives in Ohio.

Here are the options:

1) Leave the house in the life estate and rent the house in order to cover taxes (about $5000 per year) and any maintenance needed. Sell the home after the passing of both parents. The net proceeds would be split 50/50 between the two children. What are the tax implications to each of the children? Is it based on the income tax bracket of each child or is it a certain percentage subject to Massachusetts tax law?

2) Remove the house from the life estate and sell the house now. Obviously, now the value of the house is no longer protected from the government if the parents deplete their other liquid assets. What are the tax implications of this?

3) Are there any other options that we are not thinking of? Yes, there is a lawyer involved but just trying to think out of the box and see if there is any other way to sell the house while preserving the proceeds from the house.
So who is/are the life tenant(s) and who are the remaindermen?

If the deed was put in the children's name with the parents as life tenants, then there likely is no longer a stepped-up basis on the entire property value for the children when the parents pass (other than whatever portion of the interest remains in the parent's name, based in IRS actuarial tables). So option 1 does not result in a fully stepped-up basis, just the portion that remains with the last life tenant when they pass.
DIFAR31
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Re: House in Life Estate Tax Implications (Massachusetts)

Post by DIFAR31 »

Hebell wrote: Sun Apr 18, 2021 9:07 pm If you do the approach number one, when the parents die, the house will pass to the children and they will get the step up basis at that time. I'd certainly do it that way and take the rent in the interim
If I read this correctly, the children have owned the property since the day the parents deeded it to them and retained a life estate for themselves. Since the children have apparently never used the property as a residence, there will be no capital gains exclusion. If the change in ownership when the life estate was created was a gift, I would think that the children took on the basis that the parents had at the time of transfer.
Hebell
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Re: House in Life Estate Tax Implications (Massachusetts)

Post by Hebell »

My understanding is that life estate deeds are considered incomplete transfers. The transfer does not occur (to the remainderman) until the death of the parent. This is how it works with life estate deeds in florida, called lady bird trusts.
fourwheelcycle
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Re: House in Life Estate Tax Implications (Massachusetts)

Post by fourwheelcycle »

I had vaguely heard of a life estate deed before this post, but I never had an occasion to read about them. Since I have some interest in MA estate laws, although I am not an attorney and I do not live in MA, I looked on the web. Here is an article that addresses the questions asked in this post: https://www.berkshireelderlaw.com/life-estate-ownership

It appears life estate deeds get messy if the house is sold before the second life estate tenant dies. First, you have to look at whether the five year Medicaid look-back period has passed. It appears the tenants and their children are OK on that score. Second, if the property is rented, it appears the net rental income is due to the tenants and, I imagine, would be treated as income for Medicaid purposes.

Any capital gain from the sale would be pro-rated to the tenants, who would lose a portion of their $250K personal home sale exclusion, and to the remaindermen, who would get no portion of the $250K personal home exclusion and would pay capital gains tax on the full capital gain share they receive.

Hopefully, the remaindermen will each agree to sell the home at this time, if that is the selected route. Otherwise things appear to get messier.

One note on this whole situation. If my parents had a $500K asset and they needed to go into a nursing home, with no realistic prospect of ever being able to move back into their house, I would help them sell the house so they would be able to afford a presumably higher quality/amenity nursing home. Hopefully, I could help them find a high quality/compassionate/comfortable nursing home that would let them transition to Medicaid in their same rooms, at the same quality of care and amenities, if they ever spent-down their assets and needed to go on Medicaid. This exact situation happened to my mother and her siblings. Their mother needed to go into a nursing home and all of the siblings except one agreed to let their mother sell the house to help pay for a good nursing home. The final sibling took them to court, in MA, and lost.
mkc
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Re: House in Life Estate Tax Implications (Massachusetts)

Post by mkc »

- deleted response as it did not apply in this situation -
Last edited by mkc on Mon Apr 19, 2021 4:02 pm, edited 1 time in total.
bsteiner
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Re: House in Life Estate Tax Implications (Massachusetts)

Post by bsteiner »

A transfer of the remainder interest (retaining a life estate) is a gift of the entire value for gift tax purposes.

The entire value will also be included in the life tenant's estate (with an adjustment to avoid being taxed twice on the same value).

Since the property will be included in the life tenant's estate, it will get a new basis at the life tenant's death.

If the property is sold during the life tenant's lifetime, the life tenant's will qualify for the exclusion for the sale of a personal residence (if he/she otherwise qualifies for it).

Life estates and remainders can be cumbersome, for example if capital improvements are needed or sometimes if one party wants to sell.
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