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
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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
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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