What is Life Estate

A life estate (or life tenancy) is the ownership of immovable property for the term of a person’s life under common law and statutory law.

In legal terms, it is a real estate that terminates after death, at which point ownership of the property may revert to the original owner or pass to another person. A “life tenant” is the owner of a life estate.

Homeowners most commonly use life estates in the United States to ensure that the following generation inherits the family house while avoiding probate, the legal process of proving a will.

Who Owns The Property In A Life Estate?

A life estate is property, typically a home, that an individual owns and may use for the rest of their life. This person, known as the life tenant, owns the property together with another person or persons, who will automatically inherit the title to the property upon the life tenant’s death.

The life tenant has the right to continue to use the property for the rest of their lives. The remaining person or persons are known as the remainderman or remaindermen.

The life tenant and remainderman(s) can agree that all of the property will be transferred to them at death, or they can leave open the possibility that some of it may go to someone other than themselves.

Life Estate Uses.

A life estate is commonly utilized as an estate planning tool in the United States. A life estate can avoid probate and ensure that a designated heir receives title to real estate.

For example, Al owns a house and wishes for Bill to inherit it after his death. Al can accomplish this by transferring title to the residence to Bill while holding a life estate in the home.

Al retains his life estate, while Bill obtains a fee simple remainder. When Al dies, his life estate interest unites with Bill’s remainder, giving Bill fee simple title.

One advantage of such a transfer is that it eliminates the requirement for a will and the necessity to probate the asset.

One downside is that there is a slight chance of beneficiary fraud. Bill, if he could readily demonstrate an unconstrained fee simple in a particular jurisdiction, he could sell the estate prematurely to an innocent bidder, such as when Al is on vacation.

A second disadvantage for the grantor is that any provision for a remainderman (or men) (party C) is irrevocable without the approval of the remainderman.

Some states have made “beneficiary deeds” a legal requirement to address this issue.

Certain American states, such as Arkansas, Delaware, and Rhode Island, have intestacy laws that limit the surviving spouse’s rights (inheritance) to the deceased spouse’s real estate to a life estate.

In intestate successions, Louisiana has a similar default provision called a usufruct, which is solely over community property and terminates with the sooner of death or remarriage.

Some states in the United States allow for an enhanced life estate deed, in which the grantor retains the authority to transfer property to a third party without the remainderman’s approval.

A grantor can utilize this method to avoid probate without giving up the right to sell the real property.

How Life Estate Works

During their lifetime, the life tenant is responsible for the property’s upkeep. They can improve it, but they can’t encumber it or sell it by using it as collateral for a loan or mortgage.

By operation of law and the provisions of the lease, the property automatically goes to the remainderman upon the death of the life tenant, hence no probate is required. In this regard, a life estate is analogous to a joint tenancy with survivorship rights.

Life Estate Deeds

A life estate deed is widely used to create a life estate. Assume you own a home. You can draft a life estate deed in which you are named as the life tenant and your daughter is named as the remainderman.

The deed transfers title from yourself to yourself totally while you are alive, and to your daughter when you die.

A life estate deed is a very short legal instrument that creates a life estate and must be filed with the local recording office to be legitimate.

You can typically find a free form to fill out on your own online, but you may wish to contact an estate planning attorney to have one created for you. Don’t forget to pay a notary to have the deed notarized.

How Do Life Estate Deeds Work?

The property is divided into two sorts of interests by life estate documents. A life estate is a single interest that is measured across the owner’s lifetime.

A residual or remaining interest is the interest that goes at the death of the owner. The residual interest and life estate are then transferred to different owners. There are three kinds of owners:

• Current Owner (Grantor) – The grantor is the individual who creates the deed.
• New Owner (Life Tenant) – The life tenant is the individual who owns the life estate.
• Future Owner (Remainder Beneficiary) – The remainder beneficiary or remainderman is the person who will inherit the property when the life tenant dies.

These phrases, like those used in previous deeds, allude to distinct sorts of owners rather than specific individuals. A single party can play many roles.

Typically, the current owner (grantor) is also the life renter. Similarly, numerous people can fill the same role. There could be two grantors, three joint life tenants, and one remaining beneficiary, for example.

Creating A Life Estate

While a life estate is typically intended to simplify the process of transferring homeownership to the next generation, it can also be utilized to establish an income stream.

Life estates can be established to give a person with a life-long income rather than a lump-sum inheritance.

In this situation, the estate consists of a quantity of money invested in income-producing instruments such as bonds, oil and gas leases, real estate investment trusts (REITs), and other comparable investments.

The life tenant receives income for life under this arrangement, but they do not have access to the principal.

No matter what form of property is involved in a life estate, the life tenant cannot sell it or borrow money against it without the remainderman’s permission.

If both parties agree to the sale, the remainderman may seek a percentage of the revenues based on a predetermined scale that takes into account the life tenant’s age as well as current interest rates.

The remainderman can often anticipate to receive a larger percentage of the life tenant’s estate the older the life tenant is.

The Pros And Cons Of A Life Estate

The fundamental advantage of a life estate is that it avoids probate. Before any assets can be given to the rightful beneficiaries, a person’s will must be proved when they die.

The probate process takes time; the estate executor must file documentation with the court, and it might take even longer if the will is challenged.

Using a life estate to transfer property can result in a more seamless transition because the property flows straight to the remainder beneficiary.

Even if you employ a life estate, you will almost certainly need a will to pass on other items and assets. However, having a life estate allows your house, a valuable asset, to pass to someone else more smoothly.

Pros in Life estate

They include:

• Using a life estate avoids probate, allowing your beneficiary to obtain the property sooner.
• The life tenant may be able to qualify for Medicaid benefits, thereby shielding the property from estate collection.
• Once the tenant dies, the life estate cannot be used to satisfy the tenant’s creditors.
• If the beneficiary/remainderman sells the residence after the life tenant dies, the beneficiary/remainderman benefits from a capital gains tax standpoint since the life estate property value receives a step-up in basis.

Life estate cons

They include:

• The remaining beneficiary cannot be changed without the approval of the life tenant.
• If the life tenant requests for a loan, the life estate property cannot be used as collateral.
• The remainderman has no creditor protection. Because they own an interest in the property, creditors can place a lien on it if they are sued or owe a debt.
• There is no way to reduce estate tax. When the life tenant dies, the property’s fair market value is included in their taxable estate. If the estate is valued more than $11.58 million, estate taxes may be owed.
• You have no power over the heirs of the remainderman. When the remainderman dies, their share of the property’s ownership will be transferred to their designated beneficiaries, who may or may not be the life tenant’s preferred beneficiaries.

This can be especially troublesome if the remainderman predeceases you and died without leaving a will.

• If the life tenant sells the house during their lifetime, they may not benefit from capital gains taxes because taxes are calculated based on a percentage of ownership stake in the property.

An Example Of A Life Estate

A life estate agreement is typically used as part of estate planning. An elderly couple may wish to contemplate a life estate plan as an alternative to specifying a beneficiary in their wills.

A life estate arrangement grants them the right to remain in their home for the rest of their lives.

When they die, their adult kids or children will automatically inherit the property.

A widowed homeowner who is unable to live alone may enter into a life estate agreement with an adult child as the remainderman.

The parent and child now share home ownership, but the parent retains lifetime use rights. Both have the certainty that ownership of the home will transfer to the child without delay or interruption.

Life Estate Vs Fee Simple

Fee Simple Estate: The fee simple estate (also known as fee simple absolute, fee ownership, or estate of inheritance) is absolute ownership of property that grants the owner to all rights to the property that are only limited by law or private restrictions, such as zone ordinances or covenants.

The estate goes to the owner’s heirs upon the owner’s death.

Life Estate: A life estate is a freehold estate in which ownership is limited to the lifetime of the person holding the life estate (the life tenant) or some other designated person.

The owner has most of the rights to the property in that he can profit from it, possess it, or lease it, but those rights expire when the life estate expires.

Only the life tenant’s ownership interest in the property may be leased, sold, or mortgaged. The life tenant cannot alienate the property, nor may he let the estate go to waste by destroying or allowing real property to decay.

• The main difference is that the fee simple absolute is inheritable, but not the life estate. A fee simple absolute is the most comprehensive interest in real property that an individual can own because it is totally limited to the owner and his heirs, assigns in perpetuity, and is not subject to any limitations or conditions.

Under this agreement, the life tenant does not have any rights to the property during their lifetime, but they and the remainderman can sell an asset for fair market value and dispose of it as they see fit.

• Another difference is that a life estate can be used to avoid probate when handling a decedent’s estate. Using a life estate arrangement can simplify a disposal by avoiding years of legal wrangling over rights to property.

In simpler terms:

Fee simple ownership is entire and complete in the broadest definition of the word “ownership.” It’s all yours. you can use it as security for loans and so on.

It’s so complete that when you die, you can direct where it goes, to a wife, kids, charity, or whatever you desire.

It is ownership that comes with the ability to send to another in the same way that you did in your own lifetime. It is free of charge to the recipient.

A life estate is not ownership at all. You can’t will it since it isn’t yours to give. You can’t use it as collateral for the same reason. You do not genuinely own the property.

It is the total “right to use,” and it expires upon the death of the recipient. It’s the nicest thing that could happen to someone who doesn’t own the property, having the total right to use the property for life, despite the fact that the person who gets to use it doesn’t own it.

At the death of the life estate recipients, the right to use reverts to the person who donated it or their heirs.

Faqs

What are the disadvantages of a life estate?

• The remaining beneficiary cannot be changed without the approval of the life tenant.
• If the life tenant requests for a loan, the life estate property cannot be used as collateral.
• The remainderman has no creditor protection.
• There is no way to reduce estate tax.

Which type of estate is a life estate?

A life estate is a type of joint ownership of real estate. It determines how long each owner has rights to the property and what those rights are. The “life tenant” is the individual who owns the life estate and has possession of the property for their lifetime.

What is the difference between a fee estate and a life estate?

The fee simple absolute is inheritable, but not the life estate.

A fee simple absolute is the most comprehensive interest in real property that an individual can own because it is totally limited to the owner and his heirs, assigns in perpetuity, and is not subject to any limitations or conditions.

Is a life estate the same as a trust?

The giver and receiver share ownership of a life estate. An irrevocable trust permits a person to give away a portion of an asset.

What is the point of a life estate?

A life estate deed gives the property owner full use of their property until they die, at which point ownership is immediately transferred to the beneficiary.

What basic property right is not available to the holder of a life estate?

A life estate is a land interest that lasts only for the life of the holder. As a result, a life estate holder cannot leave the land to anyone in their will because their interest in the land does not outlast the person.

Can you have two life tenants?

It is feasible for there to be more than one life tenant, whether it is a surviving spouse and a family child.

What does life estate interest mean?

If there is a life estate, the life tenant’s interest in the property terminates at death, and ownership passes to the remainderman.

The life renter owns the property for the rest of his or her life and is liable for expenses such as property taxes, insurance, and maintenance.

Is a fee simple estate perpetual?

The highest possible level of interest in real estate. The estate is unrestricted, infinite, and eternal. For estates in fee simple, each state has its own statute and common law framework.

What is a life tenant entitled to as well as income?

A life tenant is entitled to a fund’s income but not its capital. The entitlement is normally for life; however, it can be for a shorter amount of time. A widow, for example, may have a life estate interest in her late husband’s estate until she remarries.

What happens to a trust when a life tenant dies?

The recipient is known as the life tenant. This right is often granted for the duration of their life.

When they die, the trust fund is passed on to the other named beneficiaries, known as ‘residuary beneficiaries.’ Unless specifically stated in the trust agreement, the life tenant has no right to the capital.

Can a life estate be sold in California?

A life estate can be sold, leased, or mortgaged unless it is expressly prohibited. Because a life estate includes beneficial use of the property, the creation, transfer, or termination of a life estate is considered a change of ownership under Proposition 13.

Which is a life estate in a property held by a widower?

The estate of dower is retained by a widow following the death of her husband and consists of a life estate of one-third to one-half of the land possessed by her husband if he held a freehold interest in the land (e.g., a fee simple) and the land is inheritable by the marriage’s issue.