Consider This Before Creating a Life Estate Deed

Say you decide you’d like to stay in your home for life. After all, with the costs for assisted living going through the roof, holding your deed might be the best senior living plan!

You can certainly draw up a life estate deed, and convey your property into a co-ownership with someone — a friend, or perhaps a grown child — who will receive your home. When you pass on, your home will bypass probate and go straight to your designated beneficiary.

So let’s check out how a life estate deed can make it work — and what to know before deciding to transfer your current deed into a life estate.

No Probate Needed: Life Estate Deed Passes a Home to the Next Generation

With a life estate deed, you can share your real estate with another person or people. You become co-owners. Each has an interest in the real estate, but for different time periods. Your co-owner gets a current ownership interest but no right to move in while you’re still alive. Unless you want to let the co-owner move in sooner, just stay in your home as you are.

Your new deed will name multiple people:

• You: You’re the life tenant, as you hold the property for your lifetime. You’re legally obliged to take care of the home. You may rent it out. You may make upgrades.

• Your beneficiary: After you enjoy your home for life, the remainder interest passes to the person or persons you name, called remaindermen.  The remainder interest is already a matter of public record. The deed shows your survivor’s ownership status. There is no need to put the home through the public and expensive process of a local probate court case.

Deed language to know: Your new deed will say the property goes to [your name] for life, then to [your beneficiary’s name] as the remainder. Good, old-fashioned property law terminology there. Sign the deed with a notary public, transfer it to a willing recipient, and record it in the home’s county. Then it’s official and part of the public record.

Troubleshooting: Potential Life Estate Impacts to Know

If you still have a mortgage balance, you’ll need your lender’s written consent before transferring your home to a life estate. And before you draft a life estate deed, consider these factors:

• By transferring a deed into a life estate, you have transferred a property interest. This can affect potential Medicaid benefits. If you and your co-owner sell so that you can move to an assisted living property, your share of the sale proceeds could knock you off Medicaid eligibility.

• Plus, assuming your co-owner(s) aren’t living in the home as their primary residence yet when it sells, they do not get any capital gains tax break on their share of the proceeds.

• Your new co-owner’s actions could impact your deed. Say your co-owner faces a lawsuit. A court judgment or claim could attach to your home’s title.

• You might die later than the co-owner. Imagine that you do outlive a younger remainder holder. Are you happy to co-own your home with your new co-owner’s heirs?

• And if your new co-owner is married, a divorce could lead to the spouse claiming a partial ownership interest in your home.

The main point here is that a life estate means co-ownership, regardless of changes that happen in life. No take-backs. Because…

A Life Estate Deed Is Not a Revocable Instrument

A life interest gives you a right to live in your own home for life, and that might be all you want to ensure. As long as you live, you have a legal right to occupy your home. No one can take away your life interest.  You’ll keep enjoying any tax benefits or homestead exemption you now have.

Just know that the new co-owner on your home’s title will get a say in any home-related transactions you might want to carry out. Say down the road you want to sell or mortgage or borrow against the property. Now, the person who holds the remainder interest must agree to the idea. Be sure you’re OK with that. (You’ll be following tax law when dividing the sale proceeds.)

And consider that you and your younger co-owner could have a falling out. Think carefully before formalizing your deed transfer. This is not revocable. You can’t simply change the life estate deed and name a different person. You must have the permission of the co-owner to remove the co-owner!

Enhanced life estate (“lady bird”) deeds, available in Florida, Vermont, Michigan, Texas, and West Virginia, can shield Medicaid eligibility.

If Not a Life Estate, Then What?

If any of the above-listed concerns give you pause, using a living trust, using a transfer on death deed (if your state allows for these), or passing your home through your will, could be better for you. Because we cannot give legal or financial advice, your best move is to speak with an estate planning attorney in your  state. Don’t forget to consult your tax expert, too.