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How is a Life Estate Treated on the FAFSA? Do the Restrictions Matter?

Mark Kantrowitz

March 04, 2013

How is a life estate reflected on the FAFSA? A student’s parent has a deed with student’s grandparent having life use of the property through a life estate. Please be New York state specific with the response. — T.G.

A life estate involves an irrevocable grant of a future interest in a property while reserving a present interest in the property. The grantor designates one or more people to have the benefit of the property for the duration of their lives, usually the grantor and the grantor’s spouse. Upon their death the estate passes to the grantee. The future interest is called a remainder and the grantee is called a remainderman.

A life estate is often used as a way to transfer title to a property to one’s heirs while avoiding probate. It can also have some tax benefits, such as a stepped up cost basis. Life estates can also be used to donate property to a charitable organization while retaining the use of the property for the remainder of one’s life.

In effect, a life estate splits ownership of a property between the present and future interests. As such, it is an asset and must be reported as an asset on the Free Application for Federal Student Aid (FAFSA). The only exception is when the property is also the principal place of residence of the applicant or the applicant’s parents.

For example, suppose a grandparent allows the parent and student to live in her home as their principal place of residence and has also granted the parent a future interest in the home through a life estate. Then the parent’s future interest in the home is not reported on the FAFSA because it is the parent’s principal place of residence. The net worth of the principal place of residence is not reported as an asset on the FAFSA, including both the present and future interest in the property, or any partial interest in the property.

On the other hand, suppose the student and parents live in their own home and the grandparent sets up a life estate to have ownership of the grandparent’s home pass outside of probate. Then the remainder of the life estate is treated the same as a vacation home and its net worth must be reported on the FAFSA as an investment asset.

The restrictions on access to the property while the grandparent is alive are irrelevant, since the restrictions were imposed voluntarily by the grandparent.

The value of the remainder is the net present value of the future interest in the property. To calculate the net present value, one must first project the date of termination of the life estate based on actuarial tables for the grandparent’s life expectancy. Then the future appreciation of the property is discounted back to the present. If the discount rate is equal to the rate of appreciation, then the net present value is just the present value of the property. There’s enough uncertainty in the future appreciation of real estate that often it is simplest to just report the current net market value of the property as an asset.

The treatment of a life estate on the FAFSA does not depend on state law. So long as the life estate was properly created (e.g., on a deed that provides the property “to the grandparent for life, then to the parent”), the remainder is an asset that must be reported on the FAFSA.


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