How to Grant a Life Estate to Non-Owners: Stranger to Deed Solutions

This week we wanted to review a question that comes up from time to time concerning whether a Life Estate can be created by a Grantor in favor of a “Stranger to the Deed.” The technical answer is no (see Sganga v. Grund, 1 AD3d 342; 2003 NY Slip Op 18026 (2003) - Link to case below) but there is a way to accomplish the same intended result if the transferring Deed is correctly drafted.

First, let’s take a look at the typical Life Estate creation scenario so that we have a framework to analyze the question at hand. If you have practiced long enough in the Real Estate law field, it is almost a certainty that you have come across the following client request.

John Smith and Jane Smith own Fee Title to their marital, one-family home in Brooklyn, New York, as husband and wife. They consult with their Estate Planning counsel, and are instructed to transfer title of the property to their adult child, Son # 1, with the express retention of a Life Estate in favor of both John Smith and Jane Smith to reside in the property during their respective lifetimes with the added benefit of retaining all available Real Estate Tax abatements/exemptions and also preserving a future stepped up cost basis in the property once the last of the couple passes away. In this scenario, a deed would typically be prepared listing the Grantors as John Smith and Jane Smith, the Grantee as Son # 1, with included language in the body of the Deed stating, to the effect, that “Grantors hereby reserve a Life Estate in favor of John Smith and Jane Smith to reside in the Premises and to retain all available Federal, State and County Real Estate Tax abatements, exemptions and benefits for the Grantors.” Your specific Life Estate language may vary but the unequivocal reservation of the Life Estate in favor of the Grantors must be clearly set forth in the body of the Deed to accomplish the reservation of the intended Life Estate. In this scenario, ACRIS Transfer Tax documents will have to be executed by both Grantors and the Grantee but there is no signature requirement for the Life Tenants as to the creation of the Life Estate. Please note that when recording a Deed which includes a reservation of a Life Estate, the recording party should check the “Life Estate Deed” option on the ACRIS recording page.

So now that we have reviewed the standard Life Estate scenario, let’s look at the following hypothetical. John Smith and Jane Smith own Fee Title to their marital home, one-family home in Brooklyn, New York as husband and wife. For reasons known only to them, they direct that a Deed be prepared to transfer title to their Son # 1 but also want the new Deed to reflect the reservation of a Life Estate in favor of Son # 2 so that Son # 2 can live in the property for the remainder of his life. Unfortunately, since Son # 2 was never a Fee Owner of the property, he would be considered a “Stranger to the Deed” and, therefore, the Grantors cannot grant Son # 2 a Life Estate in the same fashion as they did in the first example where they retained a Life Estate in favor of themselves. All is not lost however if you encounter this particular scenario. Without addressing or commenting on the potential Real Estate or Capital Gains tax issues that may be created by this type of transfer (these important issues should certainly be researched and discussed with the clients’ financial advisor before any deed is recorded), you can effectively accomplish the clients’ intended goal of granting Son # 2 a “Effective Life Estate” by preparing a deed as follows:

Grantors are listed as John Smith and Jane Smith. Grantees are listed as Son # 2 as to a Life Estate Interest with the remainder Son # 1. Both Son # 2 and Son # 1 must execute ACRIS Transfer Tax Forms as Grantees in this scenario and, similar to the first scenario, the recording party should check the “Life Estate Deed” option on the ACRIS recording page. Following this recommendation will effectively create a Life Estate in a Stranger to a Deed if the facts of your clients’ specific situation warrant such a deed transfer.

To view the above mentioned case click the below link:
https://www.nycourts.gov/reporter/3dseries/2003/2003_18026.htm