You can avoid probate, maximize tax benefits and protect your real property (home) from potential long-term care expenses you may incur in your later years by creating a California Life Estate.
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A life estate is a form of joint ownership that allows one person to remain in a house until his or her death, when it passes to the other owner. Life estates can be used to avoid probate and to give a house to children without giving up the ability to live in it.
California Life Estate
You can establish a California Life Estate whereby you transfer your property to your children, while simultaneously retaining your right to use and live in the property. Transferring property into a California Life Estate avoids some of the disadvantages of making an outright gift but, they still come with other advantages and disadvantages.
A California Life Estate establishes two interests in property: the Life Tenant and the Remainder man. The Life Tenant is entitled to the absolute and exclusive right to use the property during their lifetime. The Life Tenant can be a sole owner or a Joint Life Tenants. The Life Tenant is responsible for property taxes, insurance and maintenance of the property. And, the Life Tenant can also lease the and is entitled to receive all rents on that lease.
The Remainder man automatically takes legal ownership of the property upon the passing of the last Life Tenant. The Remainder man has no right to use the property or to collect rents generated by the property. The Remainder man is not responsible for taxes, insurance or maintenance of the property.
- A California Life Estate can be easily established by drafting the appropriate document and then filing a new Deed.
- There is no probate. The property automatically transfers from the Life Tenant to the Remainder man upon death of the Life Tenant.
- The Life Tenant right of use is protected and is not affected by any financial the Remainder man may have during the Life Tenant’s lifetime.
- Upon the death of a Life Tenant the Remainder man takes advantage of a stepped-up tax basis which reduced capital gains.
- Property established with a California Life Estate and in existence for 60 months (5 years) is protected from Medicaid claims; liens to pay for end-of-life care.
- The Life Tenant is disqualified from receiving Medicaid for the 60 month waiting period; which begins at the date of transfer.
- Life Tenants do not receive the full income tax exemption normally available when a personal residence is sold if the sale occurs during the Life Tenant’s lifetime.
- Remainder man does receive an exemption which means that they will pay capital gains tax on their proportionate share from a sale during the lifetime of the Life Tenant.
- To sell property during the lifetime of the Life Tenant, all owners must agree and sign the Deed. Once the property is sold, the Life Tenant no longer has the right of sole control over the property.
- Transferring property into a California Life Estate is irrevocable. However, all owners, Life Tenants and Remainder man can agree to a transfer. In doing so, there may be tax consequences and/or Medicaid concerns.
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