When you own a home that you love, you may dream of giving that home to your children once you pass away. But ensuring this dream comes to fruition isn’t always simple.
You’ll generally need to pass ownership rights of your real estate to another person through legal documentation like with a will, a trust or a life estate.
In this article, we’ll take a closer look at what a life estate is, how it works, how to create one and common problems that can arise when establishing one.
A life estate is a form of joint ownership that allows the current property owner to remain in the home until they die, at which point it’ll pass to the other specified owner. A life estate can be thought of as a way to pre-gift your home to your heirs while still maintaining ownership through your lifetime.
You’ll often find life estates used for homes, but they can be used for any type of real property, including land and anything attached to the land.
Life estates create a sort of legal joint ownership of a piece of property. For example, let’s say a mother wants to leave her home to her son when she passes away. She decides to use a life estate to make the transaction smoother.
She establishes a life estate for her home, which makes her the life tenant and her son the remainderman, also called the beneficiary. She can continue to live in her home for the remainder of her life if she chooses to and is responsible for making property tax and insurance payments.
While it doesn’t sound like much has changed, it has. As a life tenant, the mother no longer has full control over her house. She won’t need to get approval from her son to make large changes or upgrades. Selling it or taking out a mortgage, though, would require his approval. The same goes for refinancing. This is why it’s easier to refinance before you start the estate planning process. She also can’t revoke the life estate without his consent, so it’s important for her to make sure it’s the right solution for her family.
Upon her death, the house title would be immediately passed to the holder of the remainder interest (her son). Rather than going through probate, the only requirement to pass ownership is to file her death certificate.
If the estate’s total value exceeds a certain amount, it will be subject to an estate tax payable to the IRS. The tax owed will come out of the estate’s assets.
There are a few important steps to creating a life estate. Be aware that every state will have different life estate rules and regulations. Let’s learn how to create a life estate:
Before you decide to move forward with life estate planning, it’s important to know what you want to do with your affairs and assets. Refinancing at the beginning of this process is an important step, as it is much more difficult to do after the estate is in place.
Talking with an attorney can help you weigh the pros and cons of a life estate and learn more about any state-specific rules you should be aware of.
Next, you’ll draft the life estate deed. Several items need to be included on a life estate deed, including:
As mentioned above, consult an attorney and check with your state for required information on life estate deeds. Your attorney may also suggest different options, like a life estate by will, that may work better for your situation.
For a life estate deed to be valid, it must be recorded in the town or city that the property is in. This can typically be done at a county recorder’s office.
For families seeking to simplify the estate planning process, establishing a life estate can be a valuable option. Let’s take a look at some ways a life estate can benefit those involved.
A life estate helps avoid the probate process upon the life tenant’s death. The property will automatically transfer to the remainderman, making the process simple and easy – a will isn’t needed. This can provide relief and comfort to the life tenant because they know exactly what will happen to their property upon death.
When a life estate is established, the life tenant can use and occupy their home for the remainder of their life and be transparent with beneficiaries about what will happen with the property when the life tenant dies.
If a person needs care and is eligible to receive Medicaid, the government may try to recover the costs of care from the person’s estate via Medicaid estate recovery once they pass away. A life estate can protect the home from being included in the Medicaid recovery process, as it immediately passes to the remainderman.
While a life estate can be helpful in some situations, when things get complicated, it can create problems. Let’s take a look at some potential issues for life tenants involved in a life estate.
Owning a home can be a lifelong dream for some people, and the opportunity to pass that home to their heirs with a life estate can seem like a good option. But there’s much to consider before entering into this legally binding family transaction.
Are you ready to get started on your life estate planning? Remember, refinancing can be a good first step, since doing so after the life estate is established will be more complicated. Take action and start the refinance process with Rocket Mortgage ® today.