Life Estate Deeds
A Life Estate Deed is an inexpensive alternative in Estate Planning, but it only protects real estate. It is often used to avoid probate and save the home from being sold in the case of nursing home costs.
There are two (2) types of Life Estate Deeds; one with powers and the other without powers. Basically, a Life Estate Deed with powers allows the owner to sell the property in the future and a Life Estate Deed without powers prohibits the owner from selling the property in the future, with one exception. Most, but certainly not all clients choose the Life Estate Deed without powers because their goal is to protect the home from a Medicare lien.
In a life estate, two or more people each have an ownership interest in real property, but for different periods of time. The person (client) holding the life estate - the life tenant = possesses the property during his or her lifetime. The other owner (potentially, the client’s child/children) - the remainderman - has a current ownership interest but cannot take possession until the death of the life estate holder. The life tenant has full control of the property during his or her lifetime and has the legal responsibility to maintain the property as well as the right to use it and make improvements to it; but you cannot sell it (unless the remaindermen agree that it can be sold).
Life estates are viable planning techniques in many circumstances. They permit parents to pass ownership in their homes to their children while retaining absolute possession of the property during their lives. Under current law, by executing a life estate deed, the property avoids probate at the parents’ deaths, is protected from a Medicaid lien after five years, and receives a step-up in tax basis.
Are There Risks With Life Estates?
While life estates can be beneficial depending on circumstances and your role as either a life tenant or remainderman, there are potential issues that may arise with life estates and it’s important to fully understand the following risks:
As a life tenant, you may not easily sell or mortgage property with a life estate interest without powers. The remaindermen must all agree if you decide to sell or borrow against the property.
If the property is sold, the remaindermen are entitled to a share of the proceeds equal to what their interest is determined to be at that time.
Once a remainderman is named on the deed to your house, he or she has an interest in the home and his or her legal problems could become yours. For example, if your child, who is a remainderman, is sued or owes taxes, a lien could be filed against your home. Your child’s interest in the home is not protected if he or she files for bankruptcy. If your child gets a divorce, his or her spouse could claim part of your child’s interest in your home. Should your child die before you do, the child’s estate would have to go through probate unless at least one other remainderman was listed as a joint tenant. However, while these claims may be made against the property, no one can deprive you of your life estate interest during your lifetime.
Additionally, retitling the property in a Life Estate Deed is technically a violation of the terms of the Deed of Trust to retitle the property. Although it is highly unlikely that the mortgage company would discover that the life estate deed was filed, but if by chance the Lender does discover the new deed, they could accelerate the Note and call the balance due immediately.
If you would like to learn more about Life Estate Deeds, please contact Mr. Wittstadt at 410-525-WILL or