The Issue With Life Estate Deeds

The law provides people with many ways to protect their property, and ensure that their will is properly executed after their death. When you own something, you have a vast level of control over your property. You can change it, damage it, tear it down, repurpose it, or safeguard it. However, when you’re dead, all that disappears. The dead have no control or possession over property, and they don’t have any ownership.

There is a distinct difference between the two, which life estate deeds will make clear very quickly. To possess something means to be in control of it. Ownership, however, means your name is on it. It does not necessarily mean you possess it.

What Are Life Estate Deeds?

This is the essence of life estate deeds. A life estate deed allows you to transfer partial ownership over a property to someone else, while retaining possession of it. This means you can, for example, write your children into your life estate deed and make them the sole beneficiaries of your home, in equal parts.

When you do so, they become partial owners of the property, sharing that with you, whereas you’re the life tenant – you still possess the property, living in it, but there are limits to what you can and can’t do, and legally, it will split the property’s value between yourself and your children.

A life estate deed is an estate planning tool with several different uses. For one, it splits the value of a property, which means you can use it to reduce the overall value of your assets to get certain tax breaks and avoid certain costs associated with wealth. Sometimes, people in retirement get themselves a life estate deed so that, when the time comes, they can avail of Medicaid.

However, there are also limitations to what a life estate deed can do, and getting one will seriously limit both yourself and your children. Let’s get a bit more specific.

When a life estate deed is drafted and signed, it requires three basic parties. First, the grantor of the life estate deed. This is usually yourself, or whoever owns the property and initiates the deed to begin with.

Next, the new owner. This is the person also known as the life tenant. They will possess the property for the remainder of their life, exerting partial control over it.

Finally, the future owner, or remainder beneficiary. This is the person who will gain control over the property once the life tenant has passed on. However, even while the life tenant lives, they have certain rights towards the property, such as ultimately vetoing any decisions towards making changes to the property like adding onto it or blocking renovation. When they pass on, the property goes into the hands of their beneficiaries or next of kin, depending on their estate plan, or, in the case of a lack thereof, their state’s intestacy laws.

These roles can be split across multiple people. For example: in a joint property, the grantors (a couple, for example) may decide to create a life estate deed making themselves and one other person joint life tenants (meaning, they all share the property and have a right to it) while assigning just one or several beneficiaries.

Predictably, the more people you attach to the equation, the more complicated it gets. If one life tenant passes but the others remain, then what happens next depends on the relationships between the different people involved in the deed. However, if only one person is a life tenant and they pass on, then their right is distributed among the beneficiaries, splitting the ownership of the property from, say, three ways to simply two.

A life estate deed is one way to ensure that your property will safely make it into the hands of your close loved ones. It can also confer certain other benefits, depending on your situation. But it isn’t the only way to handle this sort of issue. In fact, there may be better ways – and understanding the problems with life estate deeds may help you come to a potentially better conclusion, or, help you decide towards a deed with even more confidence and a greater understanding of what to expect and what not to expect.

Life Estate vs. Living Trust

A revocable living trust can almost be a financial entity. Unlike a life estate deed, that simply determines ownership and divvies it up over several people, a revocable living trust is something you transfer ownership into. When you have a trust, it’s no longer your name on the deed, but the trust’s name. You retain control over the trust, and thus retain control over your property, but it is fundamentally different.

A trust can be revoked or amended at any time, and while beneficiaries can be set for the trust, control remains in the hands of the person who started the trust. Even once you’ve passed, the control you exert over your own property will still be felt – for example, you can control the rate at which assets from the trust go into the hands of your beneficiaries, if they are minors, or you can set other provisions for your property. Contact a professional for more information on what you can do with a trust.

A life estate deed will complicate a sale, and make it impossible to reach quick or decisive decisions. While it is an effective way to leave property to your children, the fact that they gain control over certain aspects of the property while you’re still alive and living in it will be more of a nuisance than anything else. While in a trust, you retain full control over a property, and it retains its full value as well, albeit not under your own personal list of assets.

What to Consider Before You Decide

Ultimately, it’s important to understand that estate planning decisions can hardly be made on a whim, and it is impossible to give concrete legal advice without all the cards on the table. If you’re not sure whether you should opt for a trust or a life estate deed on your property, or if you’re still confused as to what the difference is, and where the pros and cons lie, then it would be best to consult a local specialist.

If you are sure, it would still be a good idea to seek out legal counsel. Not only can you avoid making a massive mistake, but it is generally not a great idea to draft up an important legal document such as a deed or trust without further assistance or experience. While many online resources exist nowadays to theoretically provide you with everything you need to be your own lawyer in these matters, there’s a difference between having access to the knowledge and knowing where to look for, and what to look for, in terms of mistakes and common issues.

Contact a local estate planning attorney, and get underway on formulating the right plan for your property situation.