A life estate is something to consider during estate planning. When the creator of the life estate (the grantor) signs a life estate, they are in effect passing part of the ownership of a home to another person. This could be thought of as a way to pre-gift your home to your heirs while still retaining joint ownership.
You’ll often find life estates used for homes, but they can be used for any type of real property – land, and anything attached to the land. A life estate deed is a legal document that changes the ownership of a piece of real property.
The person who owns the real property (in this example, Mom) signs a deed that will pass the ownership of the property automatically upon her death to someone else, known as the “remainderman” (in this example, Son). As part of the deed, Mom keeps what is called a life estate, which means she can continue to live on and use the property for the rest of her life.
She becomes a “life tenant.” The deed would normally include language like “to Mom for life, to Son as the remainder.” The life estate deed is completed when Mom signs the document and it is filed with the county.
How Does A Life Estate Work?
Life estates create a sort of legal joint ownership of a piece of property. For example, let’s say a mother wants to pass her home to her son when she passes away. She decides to use a life estate to make the transaction smoother.
She’d establish a life estate for her home, which would make her the life tenant and her son the remainderman, also called the beneficiary. She can continue to live in her home for the remainder of her life if she chooses to and is responsible for making property tax and insurance payments.
While it doesn’t sound like much has changed, it has. As a life tenant, the mother no longer has full control over her house. She’ll need to get approval from her son to make large changes like selling it or taking out a mortgage. The same goes for refinancing. This is why it’s easier to refinance before you start the estate planning process. She also can’t revoke the life estate without his consent, so it’s important for her to make sure it’s the right solution for her family.
Upon her death, the house title would be immediately passed to the holder of the remainder interest (her son), also known as the remainderman. Rather than going through probate, the only thing that would need to be done to pass ownership is to file her death certificate. Don’t forget, if the total value of the estate is above a certain amount, there will be estate tax to pay to the IRS. The tax owed will come out of the estate’s assets.
How to Create a Life Estate
There are a couple of important steps to creating a life estate. Keep in mind, every state will have different life estate rules and regulations that you should be aware of. Let’s learn how to create a life estate:
• Consider if a life estate is the right choice for you and your family. Before you decide to move forward with life estate planning, it’s important to know what you want to do with your affairs and assets. Refinancing at the beginning of this process is an important step as it is much more difficult to do after the estate is in place.
• Hire an attorney to help you understand the process of creating a life estate. Talking with an attorney can also help you weigh the pros and cons of a life estate, while also learning more about any state-specific rules you should be aware of.
• Draft the life estate deed. There are several items that need to be included on a life estate deed. This includes: the date this deed was made, the name and address of the person granting the life estate, the grantee name and address, the address and description of the life estate property, a statement reserving the life estate and the signatures of all parties involved in the transaction. As mentioned above, be sure to consult an attorney and check your state’s requirements for what needs to be included in life estate deeds. Your attorney may also suggest different options like a life estate by will that may work better for your situation.
• Record your life estate deed. In order for a life estate deed to be valid, it needs to be recorded in the town or city that the property is in. This can typically be done at a county recorder’s office.
Why Create A Life Estate?
Life estates are valuable options for some families seeking to simplify the estate planning process.
A life estate helps avoid the probate process upon the life tenant’s death. The property will automatically transfer to the remainderman, making the process simple and easy – a will isn’t needed for the transfer to happen. This can provide relief and comfort to the life tenant as they know exactly what will happen to their property upon their death.
The life tenant is able to use and occupy their home for the remainder of their life and be transparent with beneficiaries about what will happen with the property upon their death.
It’s also a way to protect the home from Medicaid estate recovery. If a person needs care and is eligible to receive Medicaid, the government may try to recover the costs of the care from their estate once they pass away. A life estate can protect the home from being included in the Medicaid recovery process as it immediately passes to the remainderman.
Potential Problems with a Life Estate
While a life estate can be helpful in some situations, when things get complicated, it can create problems. In a life estate, the life tenant loses control to make major decisions related to the property without input. For example, if the life tenant wants to sell or lease the home or refinance, they need approval from the remainderman. If the life tenant wants to terminate the life estate or change the remainderman/beneficiary, they will need approval from all remainderman to do so.
Even if the remainderman agrees that the sale of the home is a good idea, the life tenant shouldn’t expect to get the entire proceeds – they’ll be split based on IRS actuarial tables.
If the remainderman finds themselves in financial trouble, creditors may be able to file a mortgage lien on the property, which would create a tough situation for the life tenant. And don’t forget, the life tenant is still responsible for making property tax payments and maintaining insurance as if they still own the property outright.
Benefits of a Life Estate Deed
There are many benefits to creating a life estate deed, sometimes called a life estate trust:
• Avoid probate. Mom gets to pass her property to Son without its having to go through probate. When she dies, he becomes the owner without a court proceeding
• No will necessary. Mom doesn’t have to include the property in a will. She signs the deed and it’s done.
• Emotional relief. Mom signs the deed and knows that she doesn’t have to worry about what is going to happen to the property after her death.
• Avoid gift tax. Using a life estate property deed can be preferable to an outright gift from Mom to Son during Mom’s life, because that could be subject to gift tax.
• A place to live. A life estate deed is often used to provide housing for someone until they die. Mom might own a home in her own name and create a life estate deed that gives her much younger husband (Stepdad) a life estate in the property so Mom can be assured he will always have a place to live. She can leave the remainder to Son, so he will get his inheritance once Stepdad dies.
The Drawbacks of a Life Estate Deed
In addition to benefits, there are some drawbacks that should be considered before deciding on this course.
• Loss of control. While Mom gets to live ion the property for the rest of her life, she can’t sell it to anyone, take out a mortgage, or control what happens to it after her death. If Son dies before Mom does, his heirs become the remainderman in his place. This might not be what Mom intended, yet she has no control over it.
• No easy reversal. A life estate deed is a legal transfer of title in the property. Mom can’t undo it if she changes her mind, unless Son agrees to transfer it back to her.
• Property taxes. Mom must continue to pay property taxes on the home during her life, which would not be the case if she gifted or sold the property to Son during her lifetime.
Other Ways to Achieve Similar Results
There are other ways to achieve the same outcome as a life estate deed:
• Revocable trust. Mom can place the property in a revocable living trust with Son as the trust beneficiary. By doing so, Mom transfers ownership of the home to the trust, yet she can continue to live there the rest of her life. Mom can set up the trust to distribute the home to Son upon her death. She still avoids probate, yet she has the power to make any change she wants to the trust (including canceling it entirely or changing beneficiaries) at any point in her life.
• Sell the property. Another option is for Mom to sell the property to Son during her life. Mom gets the money, which could be used for her care, and Son could agree to let her live there rent-free.
• Last Will and Testament. It is also possible to create a life estate in a will. Mom could leave Stepdad a life estate in the property in her will, with remainder to Son.
What If I Have A Dispute Over A Life Estate?
Life estate disputes are generally resolved through a civil lawsuit, which may result in a damages award issued to either the life tenant or the remainderman. This would depend on the losses experienced by each party.
An example of this would be how a fraudulent transfer of a life estate interest can affect both the life tenant and the party whom the life estate is supposed to revert to. This will usually require a detailed analysis of the deed documents. This is why it is always best for the deed document to be preserved in writing, and recorded with the county office, even though recording a deed is not legally required.
Identifying the Life Tenant
There are generally two scenarios when a life estate is used. The first is if a property owner wants to retain the use of property during his life but knows who he wants to give the property to when he dies. In this scenario, the owner creates a life estate with himself as life tenant and the person he wants to give the property to as the remainderman. The second option is through the use of a will; the will maker grants a life estate to one person and makes another person a remainderman. This can be helpful if the property owner has remarried. Specifically, the will maker grants his current spouse a life estate in property, then makes his biological children from his first marriage the remaindermen.
Creating a Life Estate
Creating a life estate is subject to the laws of the state where the property is located. Generally, it requires executing a deed that includes the property’s location, size and tax parcel number. This information can generally be obtained from the city or county where the property is located. To create the actual life estate, you generally must record the name of the life tenant and signify that she “retains a life estate.” After that, you must record the identity of the person who will receive the property when the life tenant dies and say she will retain a “remainder” interest in the property.
No Remainderman
If the remainderman dies before the life tenant does, what happens next depends on several circumstances. If the original grantor of the tenancy is alive, the deed that created the life estate may allow the grantor to choose another remainderman. If the document creating the life estate does not allow the remainderman to be changed, the remainder rights generally go to the remainderman’s estate. If the remainderman has a will, it should dictate who will receive the rights to the property.
Do I Need An Attorney For Life Estate Deed Laws?
Whether you are considering a life estate or are experiencing issues associated with a life estate you are involved with, you should contact an experienced and local property attorney. A local lawyer will be aware of your state’s specific property laws, and how those laws will affect your legal options moving forward.
A property lawyer can review any documentation that you are provided with prior to signing to ensure that everything is legally enforceable. Additionally, your attorney will also be able to represent you in court, as needed, should any issues arise.
Legal Assistance
Individuals who are considering drafting a trust or a will may wish to consult with an estate planning lawyer. He or she can explain the advantages of using a trust as well as a will. He or she can make recommendations based on the specific considerations of the client. He or she may even recommend using both documents, such as by using a pour-over will that places any property owned at the time of the testator’s death into the trust.
