The Benefits of Creating a Life Estate

Giving your home to a spouse or child can be much easier through a life estate. LightField Studios/Shutterstock

Giving your home to a spouse or child can be much easier through a life estate, and it will guarantee that you can live in it for as long as you need it. It also has several other benefits that can simplify giving your home to another person.

A life estate is a contractual agreement between the homeowner (the life tenant) and the remainderman (beneficiary). You can make this kind of agreement with a spouse, a child, or anyone else. It can also be made with any person the grantor (the person creating the life estate) wishes. The property will revert to the original owner (if a third party was involved) or beneficiary when they die.

Guaranteeing the Owner a Place to Live

The purpose of a life estate (also called a Lady Bird Deed) is to ensure that the homeowner(s) has a place to live until they die. While living in the house, they are responsible for paying the taxes, insurance, and maintaining the home. The termination of the agreement may occur if these terms are not fulfilled. The owner also has the benefit of claiming any available tax benefits.

Passing the home to the heir or any other person using a life estate can be accomplished by using a will or a trust, says FinanceStrategists. The documents must state that the property transfers to the beneficiary according to the terms in the will or trust.

The agreement also ensures that the heir will receive the home on the death of the original owner. This arrangement can give both parties peace and security.

One use of a life estate, Legal-Info.Lawyers suggests, could be to ensure that a special needs child has a place to live if the parent dies. The life estate would permit the child to live in the house, but it is passed on to the other children when they die. The document also would have other benefits and protections for the child.

Advantages

Establishing a life estate puts the home out of the hands of the owner. It enables the property to be passed on quickly to the new owner because it will not go through probate court. The beneficiary only needs to show a death certificate for the transfer to take place legally.

The house owner retains control of the property for as long as they live. It gives them complete leeway to do what they want with it, including living in it or leasing it. Getting a mortgage on the property or selling it is only possible if the beneficiary agrees.

Another advantage is that a life estate cannot be contested like a will. It passes directly to the beneficiary at the death of the life tenant.

Types of Life Estates

There are three types of life estates, according to Forbes:

• Life estate pur autre vie (“for another’s life”)—the term of measurement is the life of a third party and not the life of the tenant.
• Homestead life estate—This form protects the loss of the home to creditors, except when the debt is in the form of taxes or mortgage payments.
• Elective share life estate—protects the spouse of the owner from being evicted by the beneficiary when the owner dies first.

Life Estate and Medicaid

When a home is in a life estate, SmartAsset says it cannot hurt a claim for Medicaid. The government agency typically requires applicants to have few assets before paying benefits.

If you apply for Medicaid within five years of creating a life estate, ElderLawAnswers says that the agency may delay your eligibility. It could cause you to pay for nursing home treatment on your own until you have paid equal value for services out of your pocket. Medicaid often tries to reclaim expenses for long-term care by taking it out of the estate after the owner’s decease.

Tax Advantages

A life estate enables the recipient of the property to save money on capital gains. When the owner dies, the remainderman receives it on a stepped-up basis. BlueNotary says this significantly reduces the capital gains tax on the property when it is sold.

Restrictions

A life estate agreement limits the owner in several ways. The remainderman becomes a co-owner when both parties sign the document. The owner cannot take out a second mortgage or sell the home without the co-owner’s consent.

If the owner wants to make improvements or additions to the home, they are free to do so. The problem comes when they must get a second mortgage to do so. The remainderman would have to approve of it beforehand. Getting a loan or second mortgage before signing the life estate documents would be easier.

If the home is sold before death, the life tenant will not receive the full value of the sale price. RocketMortgage says that the Internal Revenue Service has actuarial tables that determine the division of the money.

Investments Used to Create a Life Estate

According to Investopedia, a life estate can also be established to create an income stream. Instead of real estate, an investment is the property controlled by the life estate.

The income stream may consist of a source of income, such as gas and oil investments or real estate investment trusts (REITs). Instead of putting a house in the life estate, the life tenant receives an income for life from the investments, but the remainderman may also receive a portion.

Disadvantage

If the beneficiary ends up in financial trouble, RocketMortgage reveals that the property could have a lien put on it. This situation could jeopardize the living conditions of the life tenant.

A life estate instrument (whether you use a will, trust, or deed) needs precise wording to accomplish the desired goals. Consulting with an estate planning lawyer ensures that your plans for transferring your home to your heirs are successful.

The Epoch Times copyright © 2024. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.