What is a life estate?
A life estate is a property, generally a home, that a person can own and enjoy for the rest of their days on earth. This individual, also known as the life tenant, is co-owner of the property with another individual. Upon the life tenant’s death, the second person, known as the remainderman, is automatically entitled to the property.
To guarantee that the following generation will eventually inherit the family house and avoid the formality of probate—the legal procedure of proving a will—homeowners in the United States typically establish life estates.
Understanding a Life Estate
One type of shared homeownership is a life estate. A life tenant and a so-called “remainderman” share ownership. As the name implies, the remainderman is entitled to ownership but cannot move in until the life tenant dies. The life tenant can occupy the property but cannot mortgage or sell it without the remainderman’s consent.
A deed that grants the property’s occupant(s) the right to use it for as long as they live creates the life estate. The individual who will inherit the property upon the life tenant’s death will also be named in the deed. The life estate deed is a legal instrument that gives the owner of a life estate the power to transfer ownership of a piece of property without naming it as part of their estate in a will. Consequently, the property is subject to the probate process, the legal procedure by which wills are validated. The probate process may be expensive and time-consuming if the estate is exceptionally large or extraordinarily complex.
If there is a life estate, ownership passes to the remainder upon the life tenant’s death. As the property owner for the duration of its existence, the life tenant bears the financial burden of maintenance, insurance, and property taxes. The life tenant also keeps all homeownership-related tax advantages.
Life Insurance as a Source of Revenue
A life estate can provide an income stream, even if its primary purpose is to facilitate the transfer of homeownership to the following generation.
A life estate can be set up to give someone a steady income throughout their lifetime instead of a lump-sum inheritance. Money invested in income-producing assets, such as bonds, oil and gas leases, real estate investment trusts (REITs), and other comparable investments, makes up the estate. The life tenant in this arrangement cannot access the original amount, but they will get income for the rest of their lives.
Without the remainderman’s approval, the life tenant cannot sell any property part of a life estate or use it as collateral for a loan. The remainderman may claim a share of the proceeds based on a predetermined scale considering the life tenant’s age and current interest rates, assuming both parties approve the sale. The remainderman’s expected share increases with the life tenant’s age.
How a Life Estate Is Created
There are just a few things you need to do after deciding you should consider building a life estate:
- Speak with an attorney: You can formalize your choice and learn more about the estate rules in your community with the assistance of an attorney.
- Make a life estate deed draft: Although you could draft the deed yourself, it would be best to have an attorney handle it so everything is clear and accurate.
- Put your life estate deed on file. Proceed to the county recorder’s or clerk’s office with your deed. For it to be accepted, it must be submitted to the county.
Options Rather Than a Life Estate
Though it’s not the only option, a life estate is a great way to ensure that your assets flow directly to your beneficiaries without going through the drawn-out probate process. Moreover, you may make an assignment-upon-death-deed: This deed transfers real estate to your heirs after death. This deed is flexible, as it can be changed at any moment, unlike a life estate.
Put your assets in a revocable living trust to shield them from creditors and the probate process. It’s an additional, adaptable option to a life estate that can be altered or withdrawn.
Irrevocable living trust: As the name implies, this type of trust you create cannot be revoked. You no longer “own” the assets once they are in the trust, and you cannot alter its conditions unless the court finds it in your favor.
Medicare and Life Estate
Medicaid is a state program that guarantees access to care for those who require placement in a long-term care facility. You cannot own more than your state permits unless specific requirements are met to be eligible for Medicaid. Medicaid additionally pursues payment from any residual estate upon your passing.
Because recipients’ homes are typically their most valued possessions, Medicaid frequently targets them. To recover the expense of your long-term care, it might, for instance, try to compel a sale or put a lien on the property.
Life Estate Types
Traditional and enhanced life estates are the two varieties. The improved form is usually referred to as a “Lady Bird” deed, and it is generally accepted that it was first created when President Johnson gave land to his wife, Lady Bird Johnson, upon his passing. The custom is even older than that, though.
The only way the enhanced version differs from the traditional is by allowing the life tenant to revoke it and sell the property or take out a mortgage against it without the remainder’s approval.
Benefits and Drawbacks of Life Estates
There are benefits and drawbacks to life estates. The primary benefit of a life estate is that it makes transferring a house to the next generation easier. The probate procedure may cause a delay in the transfer if the house is mentioned in the homeowner’s will. When a death certificate is filed, the transfer of any life estate automatically occurs.
Another possible benefit is that the house is no longer an estate asset. State governments can sue an estate to recoup costs if a person is enrolled in Medicaid and receives program-funded services.
The life estate shields it from “Medicaid estate recovery.”
Potential tax benefits exist in addition to legal benefits.
- As a homeowner, the renter can be qualified for some homestead or senior tax benefits.
- Since the house’s tax valuation will be based on its worth at the time of the life tenant’s death rather than when the life tenant bought it, the remainderman may obtain a sizable capital gains tax deduction when and if the house is sold.
There is, however, an additional possible legal drawback: the life tenant can be held liable for any legal issues a remainderman faces. A lien might be placed against a parent’s house, for instance, if the parent and child have established a life estate and the child is sued for unpaid taxes.
A homeowner must make a significant and legally enforceable decision when establishing a life estate. They are appointing an heir to the house irrevocably and giving up the chance to sell or mortgage it, barring consent from the remainderman.
Advantages:
- It makes it more accessible to pass on a house to the following generation
- shields the house from the deceased’s creditors
- permits elderly homeowners to continue enjoying the advantages of owning a house
Cons:
- exposes the owner to debt lawsuits filed against the remainderman
- limits the owner’s capacity to mortgage or sell property;
- cannot be readily reversed if the owner’s plans or circumstances change.
An Irrevocable Trust versus a Life Estate
An irrevocable trust is frequently used as an estate planning tool, much like a life estate. The irrevocable trust takes assets out of the grantor’s estate, much like a life estate does. In particular, the grantor transfers some assets and income to a trust, giving up all rights to them. The assets could include investments, cash, or life insurance. The grantor’s children, a spouse, or a nonprofit organization could be the trust’s beneficiaries.
Moreover, a life estate is “irrevocable.” The life tenant can only change the terms of the arrangement with the remainderman’s approval after a life estate deed is filed.
Nevertheless, there are applications for irreversible trusts. A trust can transmit wealth to family members while decreasing an individual’s net worth. Additionally, it takes some assets out of an estate and keeps them out of the probate procedure.
Because a trust shields some of a professional’s assets by moving them to family members, it can be an advantageous legal tactic for those in the medical field who are susceptible to lawsuits.
Illustration of a Life Estate
Typically, a life estate agreement is implemented as a component of an estate plan. An elderly couple, for instance, might think about a life estate plan instead of designating a beneficiary in their wills. Thanks to a life estate agreement, they can live out the rest of their lives in their home. After their deaths, the property will automatically pass to one or more adult offspring. A grieving homeowner who cannot live alone could designate an adult child as the remainderman in a life estate agreement. The parent and child are now co-owners of the house, but the parent still has lifetime use rights. Both guarantee that the child will inherit the home immediately and without hindrance.
For Dummies: What Is a Life Estate?
A life estate is a legal agreement that divides property ownership, allowing the first party to keep use of the asset and the second party to inherit it.
What Drawbacks Do Life Estates Have?
It would help if you had the consent of the remainderman, or second party, to sell, refinance, or make any changes to a property on which you have a life estate.
Who is responsible for paying the inheritance tax when the life tenant passes away?
The life tenant’s estate is liable for any inheritance taxes that apply to the estate.
Who has a life estate? Is the property owner?
Every named party owns the property according to a life estate deed. The life tenant, however, is still able to occupy the estate.
The Final Word
A sensible option for homeowners to guarantee that their home will be passed on to the person they want it to be with the least amount of legal wrangling or delay is to create a life estate. A life estate should only be created; therefore, it cannot be readily reversed once fully understood. The homeowner forfeits any right to mortgage or sell the property without the remainderman’s consent.
Conclusion
- A life estate is a legal way for two people to own land together.
- People who own a life estate can use the land as long as they live.
- People usually use the life estate process to make transfers easier and avoid court.
- The person who rents the property for life has all the rights and duties of an owner, except that they can’t sell or borrow the property.
