Life Estate Deed

Forum|Forum|5 years ago
April 30, 2021
2 replies
51 views

Life Estate deed created by 2 Life Tenants with 4 Remainders. One L.T. dies after 10 yrs. House is sold 6 yrs later while 2nd L.T. and 4 Remainders are still alive. How does the step-up in basis from the L.T. who died allocated?

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BobKamman

Level 15

Trick question, right? Because what makes you think there should be any stepped-up basis?

https://lawprofessors.typepad.com/agriculturallaw/2018/08/life-estateremainder-arrangements-and-income-tax-basis-.html

M

mptaxAuthor

Level 3

Life Tenants bought the house many years as tenants by the entirety before they put the house into a Life Estate Deed. Doesn't the date of death value of the house on the death of one of the Life Tenants go to the other Life Tenant or to everyone involved in some proportion?

BobKamman

Level 15

Did they ask that question when they did it? Probably not -- most of these "hillbilly probate" arrangements are done specifically to avoid professional advice.

BobKamman

Level 15

The best approach may be to use "substance over form." Did the parents really intend for the kids to have a marketable interest in the property? Did the kids even know they were given a remainder? Or should the sale be reported 100% on the mother's return -- presumably she qualifies for the $250K exclusion?

But were multiple 1099-S's issued to all five parties? Who get the money? If the kids got a check, did they turn the money over to their mother, or is this part of a scheme where the kids get cash to go on a cruise and Mom gets to stay at the county home at taxpayer expense?

And whose return are you doing -- Mom's? A kid? Some or all of the others?

If the family weren't allergic to professional advice, they could have avoided the problem by deeding the remainder interests back to Mom before the house was sold.

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mptaxAuthor

Level 3

All good questions. Deed was to avoid probate. Kids knew they were remainders. Mother gets $250K exclusion but she receives only a percentage of the selling price as there is a chart based on age to calculate her take of the proceeds. Remainders split the rest of the proceeds equally.

Sale is pending but kids expect checks which they will keep. Mom is now living with a daughter so house is vacant. But mother lived in house for at least 2 of the past 5 years.

Doing Mom's return plus one of the kid's.

Too late to deed interests back.

BobKamman

Level 15

If the sale is still pending it's not too late. But if the kids want the cash, then let them pay some tax.

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