what-are-the-types-of-legal-life-estates

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Legal Life Estates Guide - Definition & Different Types of Estates

Creating a life estate is one of many ways in which you can pass a property onto your children. Trust & Will reviews the types of legal life estates here.

Patrick Hicks

Patrick Hicks, @PatrickHicks

Head of Legal, Trust & Will

“What are the types of legal life estates I can use to maximize my estate plan?” If you’ve been looking for the answer to this question, then you’ve come to the right place. Let’s say that you own a dream house or piece of property. You know for a fact that you want to pass it down to your loved one, such as a child, when you pass away. To do this effectively, you need to put some legal documents in place. Here you have several options, such as a Trust, a Will, a Transfer-on-Death Deed, and today’s topic — a Legal Life Estate. 

In this guide, Trust & Will explores what it means to use a Life Estate, its advantages and disadvantages, and different types of Life Estates to choose from. With this information, you’ll be able to better understand whether this is the right tool to help you achieve your desired outcomes.

What Is the Definition of Life Estate?

A Life Estate is a legal tool that allows a property owner to create a type of joint ownership as a way to eventually pass on that piece of property. When the Grantor (creator) of the Life Estate signs the document into effect, they are passing part of the ownership of the home or land to another individual of their choosing. 

In other words, a Life Estate can be thought of as a way to pre-gift a piece of property to a loved one. While you will maintain ownership and right to use during your lifetime, your heir will become the sole owner upon your passing.

What is a Life Estate Deed?

A Life Estate Deed is the document used to change the legal ownership structure of the property.  Deeds are a legal document used to help affirm and prove who has interest and a right to a piece of real property. 

The term “Life Estate” describes how the ownership structure of a property works, while the associated deed is the document that proves it. Without the deed, owners and co-owners cannot prove their property interest. Therefore, it’s important to use the correct type of deed to execute your vision and make it a reality. In this case, it would be a Life Estate Deed. 

How Does a Life Estate Work?

A Life Estate is a pathway to creating joint ownership on a property with the goal of passing that property on to your joint owner when you pass away.

Let’s use an example to help explain how a Life Estate works. Let’s say you’re a mother who wants to eventually pass your home on to your daughter when you pass away. After doing some research on the various methods of passing property, you settle on a Life Estate.

By signing a Life Estate into effect, you are now the life tenant of the home. Your daughter is the remainderman, meaning she has partial ownership interest in the property. During your lifetime, you have the right to live in the home, and you are also responsible for it. For instance, you’re responsible for paying your mortgage and property taxes. 

Although in practice it might feel like you have full control over your house, you don’t. Legally, your daughter has to provide her approval any time you want to make major decisions about the home. For example, you can’t sell the home or refinance your mortgage without her approval. 

You also can’t revoke your Life Estate without your daughter’s approval, so you’ll want to make sure that this is the right decision before you put it into place.

One day, when you pass away, the home immediately passes to your daughter for full ownership. Because she is the remainderman, she already held partial interest before. Now, the rest of the interest will pass to her so that she is the sole interest holder. The property doesn’t pass through probate, so the filing of your death certificate will make the change effective immediately. 

What Are the Pros & Cons of a Life Estate?

The use of any type of legal instrument is optional, and is based on how it can match your unique circumstances and help you achieve your desired outcome. A Life Estate is no exception, and as such, it is associated with a set of advantages as well as disadvantages. 

This section will explore some of the pros & cons of a Life Estate to help you decide whether or not it’s a good fit for your Estate Plan.

Life Estate Pros

  • Avoid Probate: One of the key advantages that comes with implementing a Life Estate is keeping your property outside of the probate process. Not only is probate lengthy, it can be costly and is a part of the public record. When keeping your beneficiary in mind, it often makes sense to move properties out of probate when possible. When using a Life Estate deed, the associated property passes directly to your remainderman (beneficiary.)

  • Avoid estate taxes: Using a Life Estate deed removes your property from your estate. When you pass away, estate taxes won’t be levied on this particular property, thus helping preserve the value of your estate for your loved ones.

  • Possible tax breaks: As the life tenant, setting up a Life Estate could bring you certain tax breaks such as a reduced homestead or certain exemptions from senior taxes.

  • Reduced capital gains tax: When your beneficiary inherits the rest of the title to the property, they could benefit from capital gains tax reductions if they decide to sell. The home would be valued based on the date that you pass away. In terms of capital gains calculations, this typically offers a significant reduction since real property historically increased in value over time.

Life Estate Cons

  • Possibility of capital gains tax: If the property is sold while the life tenant is alive, the remainderman may owe capital gains taxes.

  • Financial consequences: If the beneficiary encounters financial problems, including lawsuits or collection actions, a lien could be filed against the property. These issues can affect the life of tenant, although they cannot be forced to give up their rights. Creditors and the IRS may collect against the lien if the property is ever sold.

  • Beneficiary’s heirs should be taken into account: If there is an unforeseen circumstance and the remainderman (beneficiary) passes away before the life tenant, their remainder interest would pass directly to their heirs. As the life tenant, this could put you in joint ownership with someone you didn’t intend. This may or may not be an issue depending on who your beneficiaries heirs might be.

  • Federal gift tax: If the remainder interest of the property is larger than the annual gift tax exemption, the beneficiary may have to claim the life estate property as a gift that is subject to federal tax. However, it’s entirely possible that the property will not be subject to either estate tax or gift tax. 

Are There Different Types of Life Estates?

Yes, there are different types of Life Estates. Here are three different types of Life Estates below, which we will define in the following sections:

What Is a Homestead Life Estate?

A Homestead Life Estate is one of three major forms of legal Life Estate. A homestead by definition is the primary residence in which the owner resides. There are several homestead laws that protect owners from losing their primary residence from creditors who are attempting to collect debts. 

A homestead is exempt from any forced sale in an attempt to collect debts. Each state places their own limitations on this exemption. However, there are certain exceptions to this rule, including tax debts, seller financing debts, debts for home improvement, and mortgage debt. 

If the home is owned by a married couple, they must be sure to both sign the deed. In some states, the exemption is not automatic, and the owners must file for the exemption.

What Is a Dower and Curtesy Life Estate?

Dower and curtesy relate to laws that preserve married spouses’ property rights. Dower describes a wife’s Life Estate interest in her husband’s property, while curtesy describes a husband’s Life Estate interest in his wife’s property. 

Property purchased under dower and curtesy rights is owned by the surviving spouse for the rest of their lifetime. The dower right is only released if both spouses obtain and sign a release to convey the title to another party.

The terms dower and curtesy are antiquated and are not inclusive of non-binary people, same-sex marriages, or partnerships. Over time, these laws have generally been replaced with community property and elective share laws.

What Is an Elective Share Life Estate? 

Many state statutes include laws regarding Elective Share Life Estate which protects a spouse from being disinherited from a property. If a spouse passes away, the surviving spouse has the right to make a claim for the decedent’s personal and real property. This statute applies even when, or especially when, the decedent did not leave property to the surviving spouse in their Will.

Why Create a Life Estate? 

A Life Estate can be a great option for families who are looking to simplify the estate planning process. By using a Life Estate, the owner of a property can pre-gift partial interest in the property to their intended beneficiary. When the life tenant (the owner) passes away, the property passes to the beneficiary automatically. All they’d have to do is provide proof in the form of a death certificate. For families who would like to avoid the probate process, this is a great option. Be sure to review the advantages and disadvantages of Life Estates to determine if this legal tool is a right fit for you and your estate planning needs. If it doesn’t seem like the right fit but you are looking for something similar, you can also see if a Transfer-on-Death Deed is a viable option.

However, keep in mind that a Life Estate only addresses real property, and does not address the rest of your estate. It is still critical to establish a Will to address how the rest of your assets and personal belongings should be distributed to loved ones. You might also want to consider setting up a Trust to move as many assets and property as possible out of your estate and thus out of probate. To find out how to get started, click here.

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