An Overlooked Estate Planning Tool if You Don’t Have a Trust: The Life Estate

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In my experience, most people remember to do basic estate planning tasks like adding beneficiaries or a Transfer on Death designation to important financial assets.

But what about your home?

Just designating a beneficiary in your will or assuming the home will pass to your children could create problems for your heirs. After all, probate can be lengthy and costly, and in the meantime your kids might have to deal with keeping up your property or making mortgage payments until they’re able to sell.

But there is another way.

The Life Estate

If you decide not to set up a trust, you still have options for your home. One option might be a life estate.

In this setup, you (as the “life tenant”) retain the right to live in your home until your death, at which time the property is automatically transferred to the “remaindermen,” or your stated heirs. This setup can work for individuals or for couples who want to ensure that both parties can remain in the home for their lifetimes.

State laws govern property ownership, so it’s important to find out what processes you’ll need to go through to set up the life estate where you live. Please visit your county’s government website to learn the specifics of what you need to do.

Generally speaking, you’ll need to fill out and execute a deed to the property (typically in the presence of a notary) that records your status as the “grantor,” your remaindermen’s status as “grantees,” and a notation on the deed that you will retain a life estate in the home. It will also cover basic information about your property.

From there, you’ll file the deed with your county’s Registry of Deeds so that it becomes binding. Also, be sure to update your property insurance policy to reflect the addition of new owners.

Control & Responsibility

As the life tenant, you will still legally be responsible for your mortgage, taxes and insurance costs, and property maintenance. Of course, your children (or other remaindermen) can agree to cover some of these costs if you choose.

However, even though you’ll have all the responsibilities of a full owner, your control over your home is not limitless. Once you add remaindermen to your property’s deed, you cannot unilaterally remove them without their consent. Similarly, you will not be able to sell or mortgage your home without the agreement of the remaindermen. If you do decide to sell while you’re still alive, keep in mind that the sale’s proceeds will be divided across all parties.

Of course, if everyone agrees to reverse the life estate, you’ll be able to do so – as long as you file the updated deed correctly for your locality.

In my opinion, the best scenario is an older person or couple (you, parent or grandparent) that does not intend to move and wishes to stay in their home for the rest of their lives.

Common Pitfalls

There are other potential drawbacks to a “life estate” that you should consider.

Most importantly, a life estate ties up your financial interests with that of your heirs. For example, should one of your remaindermen go through a divorce or bankruptcy or has trouble paying their taxes, there is a possibility that a lien could be filed against their interest in your property.

Similarly, the way the deed is titled will have important repercussions over time. For example, if your heirs are listed as “joint tenants,” you’ll be guaranteed that if one of your heirs should die, the ownership stake will revert to the other remaindermen. On the other hand, if you go with the default “tenants in common” designation, upon each heir’s death the ownership stake would become part of their estate and go to their heirs in turn.

As you can see, this can get complicated very quickly – not only practically, but emotionally. If you want to control the eventual distribution of the property, the way you title the deed is key to enforcing your wishes.

Finally, keep in mind that giving away assets through a life estate can affect the timing of Medicaid eligibility and trigger gift taxes for your heirs. The specifics will depend on your local laws and on the value of your property and the way you transfer ownership – for example, buying a new property with your heirs as remaindermen could have different implications than giving title to your existing home.

Again, it is very important to be familiar with your local regulations with respect to setting up the life estate appropriately and managing any potential tax consequences.

Important Benefits

That said, there are benefits to a life estate.

Not only can a life estate ensure that you’ll remain in your home, it can make it easier for your heirs to manage the logistics of your property after your death. I’ve seen situations where children have had to invest heavily in managing a deceased parent’s property until probate is completed, which can be costly and stressful for bereaved families.

A life estate can also help you meet the needs of various parties. For example, you can use a life estate to ensure that your home goes to your children from a previous marriage, while also guaranteeing that your spouse is able to stay for his or her lifetime should you die first.

Managing the Risks – or Finding an Alternative

However, it’s important to remember the risks and find ways to manage the drawbacks. Generally, you’re more likely to have a successful experience with the life estate if you are:

  • On good terms with your heirs and their families

  • Confident and in agreement about your plans and preferences for titling the property

  • Able to communicate effectively about your respective financial positions and needs

  • Willing to work together to find solutions if your situations change

If you’re not sure about these factors and you want to be certain that your property avoids probate, it could make more sense to set up a trust instead. While they’re a little more costly at the outset, trusts generally avoid the risks of both probate and the life estate, and they can also incorporate your financial assets and other properties.

Of course, as with everything in personal finance, the right decision is highly dependent on your specific situation. When making these types of plans, it’s usually very helpful to speak to an estate planning attorney, who can help you navigate the options and find the course that’s most suitable for your family.

 

Written by Bradford Pine with Anna B. Wroblewska

 

To learn about retirement savings, download my free eBook, “10 Tips You Need to Know About Your IRA Rollover.” This short book is packed with critical information that will help you make the right decisions about your retirement savings.

Written by Bradford Pine
Bradford Pine Wealth Group – New York City Financial Advisors

The views and opinions expressed in an article or column are the author’s own and not necessarily those of Cantella & Co., Inc. It was prepared for informational purposes only. It is not an official confirmation of terms. It is based on information generally available to the public from sources believed to be reliable but there is no guarantee that the facts cited in the foregoing material are accurate or complete.

Comments may not be representative of the experience of other investors. Investor comments and experiences are not indicative of future performance or results. Views and opinions expressed in the comments section are the author’s own and not those of Cantella & Co., Inc. No one posting a comment has been compensated for their opinions.

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