Does my Life Estate Qualify for Real Estate Tax Relief?

Q. My mom has owned a home in Fairfax County for over 20 years. Last year she came to your firm and did an irrevocable Medicaid Asset Protection Trust. Your firm deeded her house into the trust, but had her keep a life estate in the house. She now wants to apply for real estate tax relief, which you suggested, but Fairfax County is saying she may not qualify due to the fact that the trust her home is in is irrevocable. Is this true? How about in Maryland or DC, or in other parts of Northern Virginia? We have some friends in similar situations. Thanks for your help!

A.  As you mentioned, when we deeded your mom’s home into her Medicaid Asset Protection Trust, we had her retain a life estate in the home so that she would remain a part owner of the home and remain responsible for paying the taxes, utilities, etc. A life estate is a type of joint ownership that allows a person (or a couple) to remain in a house until his / her / their death(s), when it then passes to the other owner. The other owner is said to own the remainder interest, and this person or trust receives ownership of the entire property upon the death of the life estate 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.  They also can play an important role in Medicaid planning.

With a life estate, two or more people each have an ownership interest in a property, but for different periods of time. The owner of the life estate — called the life tenant — owns and has the right to legal possession of the property during the lifetime(s) of the life tenant(s). The other owner — called the remainderman — has a current ownership interest but cannot take possession until the death of the life estate holder. The owner of the life estate must be a natural person or persons. The owner of the remainder interest, however, can be a natural person or persons or an entity such as an irrevocable trust. The life tenant has full control of the property during his or her lifetime and has the legal responsibility to maintain the property as well as the right to use it, rent it out, and make improvements to it.

The life tenant is the person with the right to possess and use the property for the duration of their life. This means that the life tenant has lifetime use of the property. The life tenant cannot leave the property to his or her heirs. Instead, after the life tenant’s death, the property goes to the remainderman.  [Please note that this article is talking about standard life estate deeds and not ladybird deeds, also called enhanced life estate deeds or life estate deeds with powers.] Generally, the life tenant has full control of the property during their life. The life tenant can use the property, rent the property, improve the property, etc. The life tenant also has responsibilities. For example, the life tenant must maintain the property. The life tenant cannot damage or devalue the property. The life tenant may also have financial responsibilities, such as mortgage payments, real estate taxes, and utilities.  Today we will discuss tax relief for real estate taxes for life estates.

Tax Relief for Life Estates in Fairfax County

Fairfax County, like almost every other county and city in Virginia, provides real estate tax relief to citizens who are either 65 or older, or to those who are permanently and totally disabled and meet the income and asset eligibility requirements. Please click here for more information. Every county and city has its own asset requirements and income requirements in order to get total or partial tax relief.

Since your mother has remained an owner of the property by virtue of her life estate, as long as she is the one making payment of the real estate taxes, she should still be eligible for the Fairfax County senior citizen real estate tax reduction. When filling out the tax relief application, she should be sure she answers YES to the question “Is residence owned and occupied by applicant year-round as a sole dwelling?”  Please see Attorney General Opinion 13-070, where the Virginia attorney general ruled that “It is my opinion that the exemption from, or deferral of, real property taxes authorized in Article X, § 6(b) for persons not less than 65 years of age or disabled does not extend to a person who has placed title to the real property in any form of trust, but does extend to a person who otherwise qualifies for the exemption and who holds a life estate in the real property.

The Tax Relief Section of the DTA should be very aware of this AG Opinion, but you never know whether you will encounter a new employee I was not aware of this AG opinion. I suggest you contact whoever has told your mother that they don’t qualify and point out the AG Opinion that is directly on point.

Fairfax County Real Estate Tax Relief Forms are as follows:

2021 Application for Tax Relief and Affidavit of Disability Use this form to apply for tax relief under the County’s Tax Relief Program for Seniors and People with Disabilities. A complete application with all supporting documentation is due no later than May 3, 2021 for all returning applicants. Applicants who are applying for the first time may also apply for 2020 tax relief if they meet all eligibility requirements. First time applicants have until December 31, 2021 to submit a complete 2020 tax relief application. First time applicants who wish to apply as permanently and totally disabled may need to provide a completed Affidavit of Disability–refer to the application for more information.
Tax Relief Application for a Disabled Veteran or their Surviving Spouse Use this form to apply for the exemption for qualifying disabled veterans and their surviving spouses from local real estate tax on the principle residence. Please refer to Fairfax County’s Disabled Veterans Exemption page for additional information, instructions for applying, and documentation that must be submitted along with this application.

Here is the information and forms for tax relief for seniors and disabled individuals in other local jurisdictions:

City of Fairfax Real Estate Tax Relief: click here

Arlington County Real Estate Tax Relief:  click here.

City of Alexandria Real Estate Tax Relief: click here.

Prince William County Real Estate Tax Relief:  click here.

City of Manassas Real Estate Tax Relief: click here

City of Manassas Park Real Estate Tax Relief: click here.

Loudoun County Real Estate Tax Relief: click here. 

Fauquier County Real Estate Tax Relief: click here. 

Culpeper County Real Estate Tax Relief: click here

Madison County Real Estate Tax Relief: click here

Spotsylvania County Real Estate Tax Relief: click here.

King George County Real Estate Tax Relief: click here

Stafford County Real Estate Tax Relief: click here

City of Fredericksburg Real Estate Tax Relief: click here

Tax Relief for Life Estates in Montgomery County, Maryland

The Senior Tax Credit in Montgomery County, Maryland is available to homeowners who are at least 65 and for whom the property is their principal residence (see the Homeowners Property Tax Credit (HOTC) page for details). Interested homeowners must submit the Homeowners Property Tax Credit Application to the Maryland State Department of Assessments and Taxation (SDAT). To open an electronic copy of the Application, click here .

Eligible homeowners must:

Be at least 65 years of age.
Use the home as their Principal Residence.
Qualify for either the State Homeowners’ Tax Credit or the County Supplement.
Apply for the Homeowners Tax Credit. Click here for information about the Homeowners Tax Credit.

According to JD Supra, “the life estate deed will not cause a senior family member to lose his or her homeowner’s property tax credit for property tax purposes” in Maryland.

Tax Relief for Life Estates in Washington, DC

When a DC property owner turns 65 years of age or older, or when he or she is disabled, he or she may file an application immediately for disabled or senior citizen property tax relief. This benefit reduces a qualified property owner’s property tax by 50%. If the property owner lives in a cooperative housing association, the cooperative will supply and collect the applications. The following guidelines apply:

1. The disabled or senior citizen must own 50 percent or more of the property or cooperative unit;
2. The total federal adjusted gross income of everyone living in the property or cooperative unit, excluding tenants, must be less than $134,550 for 2020; and
3. The same requirements for application, occupancy, ownership, principal residence (domicile), number of dwelling units, cooperative housing associations and revocable trusts apply as in the homestead deduction.

The Senior Citizen and Disabled Property Tax Relief Application can be filed online or by using these paper form options:

In DC, as an owner of the property by virtue of ownership of the life estate, a life tenant should still be able to claim senior citizen property tax relief.

Life Estates and Medicaid Eligibility

A life estate, when used to gift property, splits ownership between the giver and receiver. Many parents set up a life estate to reduce their assets in order to help qualify for Medicaid. Even though the parent still retains some interest in the property, Medicaid does not count a retainer life estate as an asset. For more details and to see if a life estate is the right choice for you or a loved one, please make an appointment to discuss your situation.

Tax Time is Right Around the Corner. Get Your Estate Planning in Order Today!

The changing tax landscape is one of many reasons why the need for estate planning remains as important as ever. It is also imperative to determine whether strategies such as life estates are right for you.  If you have not done your estate planning or had your planning documents reviewed in the past several years, please don’t hesitate to call us fora no-cost initial consultation:

Estate Planning Fairfax: 703-691-1888
Estate Planning Fredericksburg: 540-479-1435
Estate Planning Rockville: 301-519-8041
Estate Planning DC: 202-587-2797

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