Gifts with retained life estate

Gifts with a retained life estate in general, while appealing at first glance, often creates problems. For example, you include your children on the title to your residence retaining a life estate interest in the property.

Examples of these problems include:

  • There is no estate tax benefit because the fair market value of the asset in added to the person’s estate at death. It is as though no gift was ever made for estate tax purposes but could result in gift tax at the time the gift is made (i.e when a deed creating the life estate is signed and recorded).

  • If the person holding the life estate has to receive assisted living care; the value of the retained life estate has to be calculated in order to determine eligibility for taxpayer assistance benefits (i.e. Medicaid). If the life estate relates to the person’s residence then the fair market rental value of the property forms the basis on which that calculation is made.