The Life Estate is an Overlooked Planning Tool

The Life Estate is an Overlooked Planning Tool

While most people manage to remember basic estate planning tasks, they may overlook important things – like their home.

Just designating a beneficiary in your will or assuming that your house will pass to your children can create problems, for example a long and costly probate process. While this drags on, your kids will have to maintain your property, and possibly even have to make mortgage payments until the property is sold.

A life estate can help. In this structure, you become the “life tenant” and have the right to live in your home until your death. When you die, the home is automatically transferred to your heirs.

In general terms, you’ll need to execute a deed that records your status as the “grantor,” your heirs status as the “grantees,” and a note on the deed that you retain a life estate in the house.  Then, you file the deed with the country’s Registry of Deeds and update your property insurance to reflect the new owners.

As the life tenant, you still have to pay your mortgage, taxes, insurance and maintenance costs unless your children agree to pay some of the expenses. While you will still have the responsibilities of full ownership, your control over your home is not unlimited. The grantees cannot be removed from the deed without their consent. Nor can you sell or mortgage the property without their consent. If you do sell, the proceeds will be divided among the grantor and grantees

One drawback of the life estate is that your financial interests are tied to those of your heirs. If they get into trouble such as a divorce or bankruptcy, a lien could be filed against their interest in your property. If your heirs are listed as joint tenants and one dies, their share will revert to the other grantees. If they are “tenants in common,” their stake goes into their estate, which could cause complications.

A life estate can also affect Medicaid eligibility and may result in gift taxes for heirs, although the specifics depend on local law. The way you transfer ownership is also important – buying a new property with heirs as remaindermen is different than giving title to the home in which you are living.

There are some important benefits to the life estate. Not only do you get to remain in your house; it will be easier for your heirs to manage the property after your death. You can also use a life estate to make sure your home goes to your children from a previous marriage while ensuring that your spouse can stay for the rest of his or her life if you die first.

For more information, please read:
An Overlooked Estate Planning Tool If You Don’t Have a Trust: The Life Estate | Huffington Post

Related Topics:
Protecting Client Retirement Assets from Liens and Judgments

Changes to Gift Tax Could Trigger Dubious Avoidance Techniques Social Intimacy is the Key to Workplace Trust