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A recent Wall Street Journal article examined one way that heirs can inherit real estate while avoiding the cost and hassle of probate through the use of an estate planning tool known as a life estate.

A life estate is a deed that allows the real estate owner to remain in his or her home during their lifetime. Upon the owner’s death, the property passes directly to the heir or heirs named in the life estate, who only need to provide the court with a copy of the owner’s death certificate to take ownership.

Using a life estate does have a few limitations; you cannot sell your home or change those you have named as heirs without the permission of those listed on the life estate as heirs. However, your heirs do receive a nice tax benefit: when they inherit the property, it comes to them at its “step up” value, which means what it is worth when the owner dies, not what they originally paid for it. This means heirs can reduce or eliminate any capital gains tax if they decide to sell.

If the original property owner has owned the home for many years and its value has appreciated by more than $250,000 (which is the federal capital gains exemption per owner), if the owner decides to sell before he or she dies, they will only be allowed the $250,000 exemption on the portion of the property that is theirs under the life estate. The designated heirs get no exemption unless they also live in the home.

Even with these provisos, a life estate remains a useful tool for those who want to pass along a primary residence to heirs and avoid probate.

The Flanigan Law Group is an Irvine estate planning, administration and litigation legal services law firm. For more information on California probate and other estate planning strategies, contact our law firm at 949-450-0041.