How Your Life Estate Could Be A Gift Tax Liability

Many senior citizens have used life estates in order to have a home transferred to a family member. However, it is important to understand what a life estate is. Basically, a life estate is an arrangement to have a home or property transferred to an heir following the death of the individual. The stipulation lies where the owner is allowed to remain living within the home for the remainder of their life. The person is referred to as the life tenant. The property will be transferred to the heir automatically once the original owner passes.

Although the life estate tool can be a quick and easy method to transfer real estate, it can also have repercussions. One repercussion could include having a gift tax liability due to exceeding the exemption allowed by the IRS.

In fact, under IRS code 2702, a giver can be taxed for the entire property value once transferred.

Although it may seem like this is executed during a transfer of a trust, a life estate is indeed treated as a trust because of the wording of the code and the fact that there is at least one person having interest in the property.

A great example is a widow who lives in a home worth $400,000 and decides to have a life estate established with their child and allow her to remain in the home. It is understood that the house would be transferred to the child once they pass and want there to be no probate involved. However, the problem lies in the fact that the amount for a gift exemption will be exceeded by thousands of dollars. In fact, the law covering gift tax only allows for $15,000 on a yearly basis. The amount exceeded is $385,000, which now requires them to have a gift tax return filed with the IRS. Depending on the total amount of gifting that has been done, there may be taxes owed by them.

However, this tax liability could have been avoided if an attorney would have been consulted. The attorney would have several other options available that would help avoid tax obligations through a simple trust.


When questions arise concerning a life estate, it is best to seek the advice of an attorney who can provide all of the available options to help avoid tax obligations. Regardless of having an existing life estate, you still have options as long as the remainder agrees. So get in touch with us today for a consultation.

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