What is a Life Use?
A very frequently asked question is, "What is a life use?" The simple answer is that it is a use for life in the property to which it applies. But that barely scratches the surface.
First, let's talk about a life use in someone's home, a situation that is very common. The person keeping the life use has control of the real property. He can live in it, rent it, lease it, or leave it empty. He does not have to allow others to live there, but if he wishes to do so, he could rent it out to a rock band. The advantage is that the elder person retaining a life use in his or her property does not have to worry about being kicked out of the house. The other side of the coin is that the life use owner is responsible for the taxes and upkeep of the property. This can lead to conflict between the remaindermen (the people who get the house when the life use owner dies) and the life use owner, if the life use owner can't or won't pay for taxes or other needed maintenance and upkeep.
In addition, the local tax assessor will send the real estate tax bill to the life use owner and will keep any exemptions on the property that apply to the life use owner, such as the Veterans exemption, or elderly tax freeze. The biggest financial benefit is that upon the death of the life use owner, there will be a step up in basis of the property, which means IRS and the State of Connecticut Department of Revenue Services will treat the house as having been bought at the value on the date of death, and if the children then sell the house at that price or less, there will not be any capital gains tax. Since capital gains tax currently is 15% Federal and 6.5% Connecticut, that is a significant savings.
There are downsides, however. The life use is an ownership interest in the real estate. And the ownership interest has a value in the eyes of the Connecticut Department of Social Services (DSS). It is based on the actuarial tables for how long a person at a certain age is expected to live. For example, a 70 year old man with a life use will still own about 35%. If the property is sold while he is 70, he must get that 35%. If he were 90 years old, the life use would only be about 11.5%. The comparable numbers for a woman age 70 are about 41%, and age 90, about 12%. That is because women on average live longer, so their life use is worth more.
In summary, life uses can be useful in keeping control of the property, making sure you can live there, and keeping local property tax breaks, and avoiding capital gains tax if you die. They can be a problem if Medicaid is required to pay for a nursing home and the property is sold, or if there is a second marriage situation where the children of the deceased spouse worry that the house will deteriorate if repairs are not kept up. Whenever there are variables such as these, it is wise to get competent advice before you take steps that have consequences.