A life estate is a legal arrangement that allows two or more individuals to jointly own a property. It is commonly used by parents who wish to leave their family home to their children while retaining the right to live in the house for the remainder of their lives. If using the life estate as an estate planning tool, it is crucial to have a clear understanding of how a life estate works to ensure its effectiveness.
When a life estate is established, one person, known as the 'life tenant,' holds ownership and possession of the property for as long as they live. After the life estate holder's death, ownership of the property reverts to the 'remainderman,' who assumes possession of the property only after the life tenant's passing. It is possible to name multiple individuals as life tenants and remaindermen, although this can complicate the arrangement.
It is important to note that the remainderman holds a unique position. While they do not have possession of the property until the life tenant's death, they do have a vested interest in the property. The life tenant is restricted from certain actions, such as taking out a mortgage or selling the property, without the consent of the remainderman. However, the life tenant does have responsibilities, including paying the principal of any mortgage, insuring the property, and covering certain repairs.
One potential downside of a life estate is that the remainderman's share of the property may be subject to creditors. If a remainderman faces significant debts, goes through a contentious divorce, or becomes involved in a substantial lawsuit, their share of the property could be at risk of being claimed by creditors, ex-spouses, or adversaries. In such cases, removing the problematic remainderman may be best to prevent litigation by the creditor to force sale of the remainder interest in the property.
In certain situations, the remainderman may desire to terminate the life tenant's interest. However, this typically requires the life tenant to engage in particularly egregious or illegal behavior. The life tenant does have certain rights, such as the ability to rent out the property or make changes and improvements to it, as long as the property's value is being enhanced. The life tenant is responsible for paying the interest on the mortgage, paying the taxes, and maintaining the property. Generally, any liens placed on it due to acts or omissions by the life tenant attach only to the life estate and not the remainder interest.
If the life tenant fails to fulfill their responsibilities or allows the property to depreciate significantly, the remainderman may have the option to terminate the life tenant's interest. However, this possibility depends on the specific provisions outlined in the life estate agreement. It is crucial to discuss and plan for this scenario when creating a life estate, as it can be a complex and delicate process.
It is worth noting that most life estates are irrevocable. Laws governing life estates vary by state and other states may have differing law. As an alternative to a life estate, there is a special type of trust called the Nominee Realty Trust. This revocable trust holds legal title to real estate, allowing the property owner to transfer ownership to the trust through a new deed. The trust specifies who will receive the property after the owner's death. The grantor of the nominee trust can direct the actions of the trustee, providing the life tenant with the legal ability to change the names of the remaindermen if necessary. This flexibility can be advantageous, especially when dealing with problematic children. The establishment of the nominee trust can be done concurrently with the creation of the life estate.
Another alternative to a life estate is a transfer on death deed if the purpose of the conveyance is to avoid probate or defeat the Medicaid Estate Recovery Program. Each has its benefits and drawbacks.
If you would like to learn more about life estates, as well as other methods of transferring property ownership, please contact Rogers Law to schedule an appointment. Our experienced estate planning attorney can provide you with the guidance and expertise needed to protect your family's interests in your home.