Does A Life Estate In A Property Have Anything To Do With The Other Assets?

421CFC1F-5C38-4C9C-9255-6EE2C765F6C0I was recently talking to a daughter whose mother had passed away. She told me that her step-father made a comment after the funeral that nothing would be probated or nothing would be changed until after she died.

I started to question the daughter, because I could tell that she had basically just taken his statement as fact and wasn't planning on doing anything at all as a result of the passing of her mother.

I learned pretty quickly that her mom and step-dad each had all of their own assets in their own names alone. The step-father did own a life estate in the property that mom and step-dad had lived in; at his passing, it would go to the daughter.

I explained to the daughter the difference between probate and non-probate assets. A probate asset is an asset that is in the individual's name alone, and upon their passing must go through the probate process according to the terms of their Last Will and Testament to the individuals who are named in the Will. A non-probate asset is an asset that transfers outside of probate, meaning that it transfers by operation of law to the individual, and not through a Will. 

In this particular circumstance, it was clear that the step-dad absolutely had a life estate in the property and was allowed to live in the property during his lifetime, so long as he was not living with another woman. 

However, I did not agree that all of the others assets would just stay where they are. Due to the fact that they were not jointly owned by mom and step-dad, but rather were in the mother's name alone, then they had to go through probate.

When I looked at the mother's will, 100% of her estate went to the daughter. Based on this information, I told the daughter, much to her surprise, that she did need to open an estate as the executrix of the estate, and that 100% of the assets would go to her and not to the step-dad. 

She wanted to know if she needed to give any of those assets to step-dad, and I said, not by law, as your mom provided 100% for you. It seemed obvious to me that mom wanted step-dad to have a place to live, but that otherwise he was able to take care of his own needs.

If you have questions about your family situation join us for one of our upcoming educational workshops.  Just click here to find out more and reserve a spot today.


Tax Issues on the Family Home for Loved Ones

HouseNJ.com’s recent article, “Complex inheritance taxes on a home,” explains the valuation of a home based on its fair market value (FMV) on the date of death, when considering estate and inheritance taxes.

If you have a home valued at over $1 million, it may sell close to that amount. Let’s say that you’re single and are 80 years old. You live with your widowed sister. Your will instructs that your sister should have life ownership, when you pass and then it is left in trust for nieces and nephews. What would their tax bill be?

The home's value is generally determined through an appraisal that would establish the home's fair market value.

Fair market value, in these circumstances, is typically defined as "the amount at which the property would change hands between a willing buyer and a willing seller, when the former is not under any compulsion to buy, and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts."

The transfer of a life estate to the sister, followed by placing the home in a trust for the nieces and nephews, would mean they’d have an inheritance tax liability in New Jersey. The sister is a Class "C" beneficiary under the state’s inheritance tax laws, and the nieces and nephews are deemed to be Class "D" beneficiaries.

Generally, Class "C" beneficiaries have a $25,000 exemption and anything over that exemption is taxed at 11% on the next $1.075 million. The rates then go higher as the amount increases. Transfers to Class "D" beneficiaries are taxed at 15% on the first $700,000 and 16% on amounts exceeding $700,000.

This is unlike the situation where a beneficiary receives a readily determinable amount at death. In such cases, the tax can be calculated easily by reference to the beneficiary classes and applicable tax rates. But in this scenario, the value of the interests the beneficiaries will ultimately receive is uncertain.

However, state law provides a solution for this situation: the estate and the New Jersey Division of Taxation may use the "Compromise Tax" procedures to agree upon an inheritance tax liability. The calculation of the compromise tax is based upon actuarial factors according to the life expectancy of the current beneficiary, his or her beneficiary class and the relative probability of assets passing to the remainder beneficiaries and their respective beneficiary classes. In most cases, the taxpayer offers a proposed compromise on the inheritance tax return for consideration by the Division, based on the taxpayer's assessment of the most probable outcome.

Talk to an experienced estate planning attorney to make sure you understand and plan accordingly.

Reference: NJ.com (June 19, 2017) “Complex inheritance taxes on a home”

  • Fill in the form below to download your e-book

    Download your free Avoid These Five Common Estate Planning Myths e-book
  • This field is for validation purposes and should be left unchanged.