A life estate is an interest in land measured by the duration of a human life. A form of joint ownership, a life estate gives the life tenant ownership rights during his or her lifetime, but when the life tenant dies, the remainder interests goes to a remainderman beneficiary. A conventional life estate is created by deed, will or trust and is an express act by the grantor. It can be created and measured by one’s own life or during the life of another (referred to as a life estate pur autre vie). Most commonly life estates are formed for real estate interests.
Both the life tenant and the remainderman beneficiaries have ownership rights in the property. Neither has the right to sell the property without the other’s permission during the lifetime of the tenant. The lifetime tenant has the right to use the property. Typically, the life tenant is also responsible for paying the property taxes, paying to maintain the property and keeping the property insured.
Once you create a life estate, you cannot change your mind without the permission of the remainderman. This gives stability to the concept, but limits the rights of the original owner. Joint ownership is created and cannot be modified without the approval of the others involved. This not only applies to the sell of the property, but also to financing. The property cannot be subject to a mortgage without all owners’ permission.
Pros of a Life Estate
Probate Avoidance: A life estate does not go through probate. It passes directly to the beneficiary who can take control immediately. The property is not subject to estate tax because it is not part of the deceased’ estate, but it may be subject to gift tax at the time of its creation.
Tax breaks: The life tenant may benefit from certain tax breaks such as reduced homestead exemptions or senior tax exemptions. The remaindermen also benefit from capital gains tax breaks because of a step up in basis.
Medicaid Eligibility: Setting up a life estate may assist in Medicaid eligibility as long as the 5-year look-back window has been met.
Cons of a Life Estate
Restrictive:Once it is established, it cannot be modified without all joint owner permission. This can be problematic if remaindermen die prior to the life tenant. The life tenant is then forced into joint ownership with the heirs of the remaindermen who may not have the same wishes for the property.
Creditors:Creditors of remaindermen may be able to secure a lien against the property creating issues for a life tenant. The creditors cannot force the life tenant out of the property, but if it is sold, the creditors will collect on their liens.
Determining whether a life estate creates more pros than cons depends on each unique situation. To learn more about whether this strategy fits in with your overall estate planning goals, contact the estate planning attorneys at Stouffer Legal in the Greater Baltimore area. You can schedule an appointment by calling us at (443) 470-3599, emailing us at office@stoufferlegal.com, or register for an upcoming free webinar using the link below:
https://attendee.gotowebinar.com/register/9139367569933998603
https://attendee.gotowebinar.com/register/6989154934117599757
https://attendee.gotowebinar.com/register/3476505554443018764
