When you need to transfer property to another person after death, a life estate deed is one of your best options. These popular real estate planning instruments may allow you to avoid the expensive and time-consuming probate process, and life estate deeds are well-established and supported in most states’ legal systems. However, life estate deeds do have a few potential drawbacks. It’s important to weigh the pros and cons of this property ownership transfer instrument so you’ll know whether you should use it. Let’s break down life estate deeds in more detail.
What is a Life Estate Deed?
Put simply, a life estate deed is a specialized type of deed that lets a property owner use their property while they are still alive, then automatically transfer ownership of the property at the time of their death. At their core, life estate deeds are designed to transfer property nearly instantaneously at death without compromising the current owner’s rights during life.
A “life estate,” meanwhile, can be any property but is usually a residence that the owner both owns and uses for the duration or a significant portion of their lifetime. The owner of the property is called the life tenant. Through a life estate deed, the life tenant shares ownership of the property with one or more other people – those other tenants receive the property title when the life tenant dies.
How Does a Life Estate Deed Work?
On a technical level, life estate deeds divide their assigned property into two different interest types:
The life estate, which is the interest based on the current owner’s lifetime
The remainder interest, which is the interest that passes after the owner’s death
Additionally, life estate deeds name three different types of owners:
Grantor or current owner, which is the person making the life estate deed
Life tenant or new owner, which is the person who owns the life estate. The grantor and life tenant are often the same person
The remainder beneficiary or future owner, which is the person who will own the property after the current life tenant dies. This person is also called the remainderman
In any case, multiple individuals can fill in the same ownership role depending on the details of the life estate deed in question. For example, one person could be both the life tenant and grantor, and there could be three remainder beneficiaries. By setting up interest in this way, life estate deeds technically establish remainder beneficiaries as partial owners of a piece of property. Therefore, when the life tenant dies, the ownership of the property can transfer seamlessly to the new owner without having to go through the lengthy probate process.
[ Rental property investor, rehabber or wholesaler? Get to know which investing strategy is the best fit for YOU by attending our FREE online real estate class. ]
How to Create a Life Estate Deed
Though life estate deeds can be valuable instruments, you must be careful when creating them. The deed writer must use the correct language to ensure that the relationship between the owners is airtight and easy to understand upon ownership transference. Furthermore, if multiple people fill the same role in the life estate deed, there has to be clear language that defines every individual’s relationship. Once you understand which individuals will play which roles in your life estate deed, you can download life estate deed forms and fill them out yourself. However, it may be wiser to hire legal assistance to ensure that your life estate deeds are written correctly and don’t contain any loopholes that may be exploited later. Additionally, every state has its own unique life estate deed requirements. Local attorneys or life estate experts will know these requirements and can ensure you don’t miss anything important.
Pros of a Life Estate Deed
There’s no denying that a life estate deed carries several benefits and advantages, especially compared to other property transferring legal instruments. These benefits include:
The ability to avoid probate. Probate is a lengthy and often costly process during which legal experts determine who receives what property or inheritance from a deceased person. With a life estate deed, a parent can pass their property to their children without those beneficiaries having to go through a court proceeding
Eliminating the need for a will. A life estate deed may mean that a property owner doesn’t have to include their property in their will
No gift tax. Life estate property deeds are not subject to gift taxes, so they are a cost-effective means of transferring property to the next generation
Ensuring that the life tenant has a place to live until their death. Life estate deeds can secure property ownership for the foreseeable future without requiring the owner to leave the property before their death
No risk for Medicaid estate recovery or other estate recovery processes
Cons of a Life Estate Deed
However, it’s also important to know the potential pitfalls or downsides of a life estate deed before drawing one up for your own property. These include:
Lack of control for the owner. Once a life estate deed is set up, the life tenant can’t sell it, take out a mortgage, or otherwise control what happens to the property after they die
Property taxes, which remain for the life tenant until their death. This would not be the case if the property owner sold or gifted the property to their children or another beneficiary, for example
It’s tough to reverse. Be sure that you want to set up a life estate deed before beginning the process, as overturning this legal instrument is very lengthy and difficult
The owner is still vulnerable to any debt actions that may be brought against the future beneficiary or remainderman
In other words, life estate deeds may only be a good idea if a property owner has absolute trust and faith in the beneficiary or remainderman.
Life Estate Vs. Irrevocable Trust
Property owners can use other legal instruments to ensure that their real estate is transferred to their intended beneficiaries upon their death. One of these is an irrevocable trust: a specialized trust that takes control of certain assets away from the estate of the grantor. The grantor relinquishes their rights to the assets and income for their property and transfers them to a trust. The trust is then overseen by a trustee, and ownership of the property transfers to a beneficiary upon the grantor’s death. However, irrevocable trusts don’t provide any benefits to the grantor, like a residence. But many people choose irrevocable trusts since they reduce the wealth of a grantor on paper, thus avoiding certain tax payments and minimizing the likelihood of the probate process playing a role in asset transfer.
Life Estate Deed Vs. Other Forms
There are other forms or tools to consider, such as the right of survivorship. A right of survivorship binds ownership of a property to two people in a partnership or a marriage. If one person in the partnership dies, the other is immediately granted exclusive ownership of the property. Property owners can also use so-called revocable trusts. These allow property owners to continue living at their property for the remainder of their lives but still transfer ownership of the property to the trust beneficiary. The trust will only distribute ownership of the beneficiary upon the current owner’s death.
As you can see, there are multiple reasons why you might consider using a life estate deed when planning asset transfer for the future. Being able to avoid the expensive probate process is a great advantage in and of itself. But life estate deeds also have many other considerations to keep in mind before signing on the dotted line. For the best results, hire a life estate or estate transfer attorney so they can advise you on the best legal instrument to use. If you decide to use a life estate deed, they will also be able to make sure your deed is written correctly.
Ready to start taking advantage of the current opportunities in the real estate market?
Whether you’re brand new to investing or have closed a few deals, our new online real estate class will cover everything you need to know to help you get started with real estate investing. Expert investor Than Merrill explains the best real estate strategies to help get you on the path towards a better financial future.
Register for our FREE 1-Day Real Estate Webinar and get started learning how to invest in today’s real estate market!