What you need to know about California Life Estates

Are you looking for a way to provide secure housing for a loved one if you pass before them, while preserving your home for another ultimate beneficiary such as children, a California life estate is worth considering. The following is an introduction to California life estates, how they works, and the pros and cons the life estate. 

Defining a California Life Estate

A life estate is an ownership right that allows one person own a piece of real property for the duration of their life. After  their death, the real property ownership rights instantly transfer to the next beneficiary  designated by the original owner. 

A life estate can be a useful estate planning tool it is often used by couples who are on their second marriage to bequeath a life estate to their new spouse. This ensures that after the older spouses passing, their partner can continue to live in the property. Under this arrangment the surviving spouse will find it difficult to sell or transfer the property title because of the limitations of a life estate

After the surviving spouse passes away, those persons such as children, nieces, or others who were named as the life estate remainder owners will become the ultimate beneficiaries of that piece of real estate. 

How Does a Life Estate Work?

A life estate establishes two interests in the real property: the Life Tenant Owner and the Remainder Owner (also known as the Beneficiary). 

The Life Tenant Owner:

• Maintains the absolute and exclusive right to use the property during their lifetime. 
• Can be a sole or joint Life Tenant. 
• Usually maintains responsibility for insurance and general maintenance.
• May rent out the property and collect any income generated by charging rent. 

The Remainder Owners:

• Automatically take legal ownership of the property immediately upon the death of the last Life Tenant.
• Have no right to use the property or collect income generated by the property.
• Are not responsible for property maintenance as long as the Life Tenant is still alive.
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Advantages of a Life Estate

Here are four advantages of creating a life estate:

• Cost and Ease:

  A life estate is simple and inexpensive to establish. Transferring title after your death is also quick and easy.  

• Probate Avoidance:

  Life estates avoid a California Probate. When the last surviving Life Estate holder dies, the property automatically transfers to your heirs.

• Life Tenant Benefits: A life estate protects the Life Tenant’s right to use and occupy the property. The Remainder Owner’s financial problems don’t affect the Life Tenant’s absolute right to the property during their lifetime.

• Tax Advantages:

• The remainder heirs will get a stepped-up tax basis for capital gains purposes as of the date of the grantor’s death (if the life estate is created upon death).

• Long-term care planning. If a life estate is established prior to the applicable look-back period, the property is protected from Medicaid spend-down or the Medicaid Estate Recovery Program (MERP).

• The life Tenant Cannot easily Sell the property.

  A life tenant can Sell their life estate to a third party. However, this third party is purchasing a right to own the property for the duration of the Life tenants life. Once the life tenant dies, even if they no longer own the property, the third party purchasers ownership rights terminate and the property transfers to the designated remainder beneficaries.

Disadvantages of a Life Estate

Using a life estate isn’t right for everyone, which is why it’s critical to consult an experienced estate planning attorney before creating one. Here are three potential disadvantages to a life estate:

• Tax Consequences: If the property is sold while the Life Tenant is still alive, there may be income tax consequences. Life Tenants do not receive the full income tax exemption available when a personal residence is sold. Remainder Owners do not receive any income tax exemption. Any capital gains tax due would be owed from the Remainder Owner’s share of the house sale proceeds.
• Difficult to Sell:  Given the Life Tenant’s rights to occupy or rent the property, it may limit the buyer’s willingness to purchase a property where a life estate tenant is involved.
• Permanence: Transfer of property into a life estate is irrevocable. But if all the Life Tenants and Remainder Owners agree, a change can be made. If the life estate is created while the grantor is living, then the grantor severs ownership rights to the property.

How to Create a California Life Estate

Here’s how to create a life estate:

1. Consult an estate planning attorney to explore whether a life estate is right for you.
2. If you decide that a life estate is appropriate, hire the attorney to draft a life estate deed for you and record it in the county where the property is located; or,
3. The attorney could include a provision in your estate plan to create a life estate in the property upon your death.

California Property Taxes and Proposition 19

Navigating California property taxes can be a challenging endeavor. To make matters worse, some property transfers are not subject to reassessment, while others may trigger reassessment. It’s essential to have a solid understanding of these rules to avoid unexpected tax consequences.

For those seeking a comprehensive explanation of Proposition 19 and its implications for California property taxes, Proposition 19, which was passed in California, introduced changes to property tax assessments that can significantly affect estate planning decisions. Speak to a San Francisco Estate planning lawyer to discuss any potential tax consequences you may face.

Life Estates and Property Tax Considerations

Now, let’s learn how property taxes relate to life estates. In a life estate, the individual is granted full the right to live in the property typically also has the authority to rent it out. This level of control over the property may have implications for property tax reassessment.

If the life estate holder is your spouse, things generally proceed smoothly from a property tax perspective. However, if the life estate holder is someone other than your spouse, such as a niece or another family member, this could potentially trigger a property tax reassessment.

Here’s an example: If you purchased a property 40 years ago you currently enjoy the benefits of low property taxes due to Proposition 13. If you decide to leave the property to your niece with a life estate, there is no reassessment exclusion for such transfers. As a result, the property may be reassessed at its current market value, potentially leading to a significant increase in property taxes for your niece.

Well Crafted Estate Planning Solutions for Complex Family Needs

Are you facing complex family situations with many competing interests that require specialized estate planning solutions? Whether it’s setting up trusts for special needs children, addressing unique financial considerations, or providing expert guidance on estate planning and trust administration, we have experienced estate planning lawyers on staff with expertise to craft tailored solutions.

Contact our San Francico California Estate planning Laywers today to discuss your unique family situation and secure a future where your loved ones are cared for. Call us at (415) 753-6200 our services and schedule a consultation with our estate planning lawyers.