What Is A Life Estate? | Life Estate Deeds | Guaranteed Rate (2023)

What Is A Life Estate? | Life Estate Deeds | Guaranteed Rate (1)

You’ve built a lifetime of memories in your home. Now you may be thinking about the future and considering what will happen to your property after you’re gone. Wouldn’t it be wonderful to pass your home down to your loved ones so they can continue creating memories of their own?

That’s where a life estate comes in handy. Depending on your circumstances, it may be an extremely helpful way to guarantee your forever home lives on with the people you care about most.

Like any legal contract, however, there are potential downsides to consider. Homeowners sacrifice some amount of control over their property when creating a life estate. It may also increase a homeowner’s risk exposure to legal actions such as liens.

Here’s what you need to know about life estates to help determine if they’re right for you.

What is a life estate?

A life estate is property that’s jointly owned by two people with the understanding that one of them — the life tenant — will retain possession and residence rights the rest of their life. Once that life tenant dies, the property title automatically transfers to the other person, known as the remainderman.

The main purpose of a life estate is to make everything go smoothly when transferring property to a beneficiary after the homeowner’s death. Rather than force loved ones to go through probate and navigate those sometimes tricky legal proceedings, you can use a life estate to easily pass your property along to whomever you choose.

Keep in mind that even when property is included in a will, beneficiaries usually still need to jump through some legal hoops. In contrast, a life estate is arguably the easiest way to avoid probate and transfer ownership of your home after you’re gone. As such, it can be a pretty valuable estate planning tool.

A life estate can also protect a homeowner’s best interests as they get older. The terms of a life estate deed typically stipulate that the life tenant retains the right to reside on the property until they die. With a life estate, you can rest easy knowing you’ll be able to continue living in your home as long as you wish — assuming you keep up with all financial obligations like mortgage payments and property taxes, of course.

How a life estate works in practice

Life estates usually make the most sense when a homeowner wishes to pass their property to an heir after their death, but also ensure they will be able to continue living in their home until they die.

First, you will need to draft a life estate deed naming both the life tenant and the remainderman. The life estate deed is simply the legal document detailing the conditions of this agreement. Be sure to work with an attorney who understands the specific laws covering life estates in your state to cover all of your bases and receive the best legal advice possible.

As long as the life tenant is alive, they have the authority to make whatever updates or changes to the property they like. They may even sell or mortgage the property so long as the remainderman signs off on the transaction.

The flipside to that coin is life tenants are also responsible for maintaining the property and making any necessary repairs, which can become much more difficult as they get older. Life tenants also need to stay on top of property taxes, homeowners insurance and other financial or legal obligations attached to the property.

When the life tenant dies, possession of the property immediately passes to the remainderman, effectively removing probate from the equation altogether.

The life tenant doesn’t necessarily have to be the primary homeowner, either. For instance, a husband could name his wife as the life tenant even if she’s not listed on the mortgage or title.

Who owns the property with a life estate?

A life estate is a joint ownership, but there are some caveats. The life tenant retains both possession of the property and the right to reside there until they die.

In the meantime, the remainderman holds ownership interest in the property, but doesn’t gain full possession until the life tenant’s passing. Although there are two owners — or possibly more, depending on the number of remaindermen — each one retains control of the property at different times.

Different types of life estate deeds

When exploring your life estate options, you may come across two different types available in your area:

  • Traditional life estate deed
  • Lady Bird deed

Let’s take a look at what each has to offer.

Traditional life estate deed

A conventional life estate deed functions as described above. Simply put, when the life tenant dies, the life estate passes to the designated heir or heirs. As a joint ownership, a traditional life estate requires both parties — or all parties, if there are multiple remaindermen — to come to an agreement before any major transactions regarding the home can be completed. That means both the life tenant and the remainderman have to consent to any decisions about leasing real estate, selling the property or taking out another mortgage.

Lady Bird deed

Sometimes called an enhanced life estate deed, a Lady Bird deed differs from traditional options in one important way: It gives the life tenant more control over the home, including the right to sell the property or refinance an existing mortgage.

Life tenants can also revoke the life estate at any time without needing to consult the remainderman. Traditional life estate deeds don’t offer that flexibility; once you’ve agreed to the terms of the contract, it’s very difficult to remove someone from a life estate or dissolve it entirely.

Keep in mind that Lady Bird deeds are only authorized in a few states, so unless you live in Texas, Florida, Michigan, Vermont or West Virginia, this option isn’t going to be available in your area.

What Is A Life Estate? | Life Estate Deeds | Guaranteed Rate (2)

Benefits of a life estate

As noted, a life estate can be very useful for estate planning purposes. Although it can be a difficult subject to think about, homeowners should really consider what’s going to happen to their property after they’re gone. Creating a life estate offers some pretty significant benefits to mull over:

  • Avoid probate and simplify legal proceedings
  • Steer clear of additional taxes
  • Protect ownership interests

Avoid probate and simplify legal proceedings

If you have someone specific in mind to inherit your home, a life estate can alleviate the headache of going through probate. By creating a life estate deed, you don’t even need to include the property in your will — and that’s one less thing to worry about during estate planning.

Steer clear of additional taxes

A life estate may also ease the burden of certain estate taxes because the transferred property is not considered a gift. Be sure to check with your attorney to see if there are any financial advantages to setting up a life estate before signing on the dotted line.

Protect ownership interests and guarantee yourself a place to live

Another great advantage of a life estate is that it protects your right to your residence. Consider someone who’s getting older and decides to hand over the title to a family member as a precautionary measure. That family member could then turn around and sell the property against the homeowner’s wishes. The conditions detailed in a life estate deed guarantee that as the homeowner, you can continue living in your home for as long as you wish.

Something else to consider is if you plan to rent all or a portion of the property to another tenant. With a life estate, the designated life tenant retains all the proceeds from those transactions — not a bad way to fund your retirement.

What are the potential downsides of a life estate?

With all that being said, a life estate isn’t perfect for every scenario, so it’s good to know what risks you might face if you go this route. Some of the disadvantages include:

  • Less flexibility as a homeowner
  • Expose homeowner to additional obligations
  • Locked into property transfer agreement

Less flexibility as a homeowner

As discussed earlier, life tenants need to consult remaindermen before making any major transactions related to the property. If you decide down the road to sell or mortgage the property, your remainderman would need to OK it first.

Also, if you do sell your home, you would need to split the proceeds with your remainderman. The exact breakdown of those proceeds will depend on how ownership interest is shared between the life tenant and the various remaindermen.

Expose homeowner to additional legal obligations

Because a life estate is a joint ownership, each party is affected by any legal or financial issues the other runs into. Even if you’re in good financial standing, creditors could place a lien on the property if your remainderman owes back taxes, misses mortgage payments on real estate investments or neglects their financial obligations in other ways.

Locked into the property transfer agreement

Traditional life estate deeds are legally binding and virtually ironclad, so homeowners don’t have the luxury to change the terms of those agreements down the road. Lady Bird deeds offer more flexibility, but as discussed, that option is limited to just a few states.

Another possible issue to consider is what happens if the remainderman passes away before the life tenant. In those situations, the remainderman’s interest in the property passes to their own heirs, even if those individuals weren’t named in the original life estate deed.

How to dissolve a life estate?

Unless you have a Lady Bird deed, the only way to dissolve or revoke a life estate is to get your inheritors to agree to it. As you might imagine, that’s easier said than done. Carefully consider the long-term ramifications of a life estate before creating one, because there’s usually no turning back once the ink has dried on your signature.

In conclusion

A life estate can be a very helpful estate planning tool. It simplifies the process of transferring property to your heirs after you’re gone, while protecting your rights as a homeowner. Your loved ones may also be able to take advantage of certain tax breaks when the property changes hands.

That’s not to say that life estates are always the best course of action, though. Homeowners lose a certain amount of control and flexibility under these arrangements, and there could be unforeseen inheritance issues down the line if a remainderman dies unexpectedly or decides to sell their share of the life estate.

If you’re interested in creating a life estate, consult an attorney who specializes in real estate, property laws or estate planning so you get the best guidance possible. Above all else, be sure to do your due diligence before deciding if a life estate is a good fit for you.

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