Life Estate Deed or Living Trust: Which Path Is Right for Your Home?

It’s never too soon to plan out the transfer of your deed after you pass. One way to do it? The tried-and-true method of writing your last will and testament and including your home in it.

You have other choices, though. The life estate deed and the living trust are popular vehicles for a deed transfer after a homeowner’s death.

A life estate deed divides your deed into shared ownership right now. A living trust lets you control your deed as long as you’re alive, then pass it on. Both strategies avoid probate — but they work in different ways.

In this article, we break down the pros and cons through a brief Q&A session.

Q. First, Why Avoid Probate?

A. The local probate court deals with the distribution of assets when someone dies. It provides an excellent service for those who use a will to pass on their homes — and for people who die without having done any planning at all.

Letting the home go into probate is typically the easiest way to pass your deed along after your lifetime.

But finding ways to keep inheritance matters out of probate is important to many deed holders. Why?

• They might want to keep their family matters out of the public eye.

• They might be concerned that someone may try to challenge the will in probate.

• They might be transferring homes in other states and wanting to avoid multiple probate cases.

• They might just want to save time and court costs, and get that deed passed along right away. 

So, although your local probate process could be simple enough to use a will to leave your deed to someone, using a trust or a life estate could still make sense. Especially if one of the above scenarios matches your own.

Q. Is Maintaining Control of the Deed the Main Thing?

A. A revocable living trust leaves you more control, hands down. During your life, you are free to sell or borrow against the value of your deed. You get any rental income. When you die, your home passes to its next owner without the need for probate.

Granted, setting up a trust is complicated. Trusts have legal costs. The life estate can offer peace of mind in an easier-to-accomplish way. But a life estate deed shifts control. You live in the home, but now you’ve shifted the ownership to your new deed’s named beneficiary.

You get to keep the life estate (right to live there). But you can no longer make individual decisions about your deed. You won’t be able to sell or take money from your home equity once you’ve created a life estate deed.

Sure, you can change a life estate deed. But you’ll need permission from your newly named owner to take any action on the deed. Think carefully. Are you sure you’ll never need to sell or borrow to cope with surprise money problems?

A life estate deed is simple to create. But a living trust keeps you in the driver’s seat. 

Q. Will the Trust Cause Selling Hassles for the Beneficiary?

A. With a revocable trust, also known as a living trust, you can assume the role of trustee. This keeps you in charge of your deed throughout your lifetime.

After your death, the trustee you name receives control over the deed in the trust. Plenty of trustees/beneficiaries named in trusts go to sell properties without any issues, every day.

Settlement or title company agents will check that an authorized person is signing documents on behalf of the trust. Do name a successor trustee in case your chosen beneficiary dies before you do. Give your named beneficiaries a copy of your trust document.

To make things easier for the trustee to sell to a subsequent deed holder, some settlement agents and title companies (with enough advance notice) will let the buyer make the payment out to an individual seller’s name, rather than the trust. This gives your beneficiary prompt access to the proceeds after settlement.

Read more about the nuts and bolts of living trusts at Deeds.com.

Q. What Tax Issues Should Be on the Radar?  

A deed holder concerned with tax planning might hear about life estate deeds. Your tax expert might tell you the life estate offers potential tax benefits.

At the time of death, your life estate ends and the deed fully vests in the new owner on a stepped-up basis. This has the benefit of keeping taxable capital gains down if your chosen deed recipient wants to sell.

It’s different with a revocable trust. Remember that you have the right to change or end your revocable trust while you’re alive. So you’re not creating any estate tax planning benefits. But that might not matter to you if you have a modest estate.

There are other tax impacts involved in transferring a deed rather than using a plain-old will. And tax outcomes differ, depending on what the new deed holder will want to do and when. So, speak with your tax adviser for guidance in your case.

One more thing: Keep on top of your tax responsibilities. Even if you create a life estate deed, which transfers ownership today, you do have to keep paying property taxes during your lifetime.

Wrapping Things Up: Where’s the Will?

Let this brief review serve as an orientation for your own due diligence. Whether you opt to create a life estate deed or a living trust, you’re taking control of your home’s value, and planning for a smooth deed transition after you pass.

Use caution! The terms of a trust or life estate will override a last will and testament, so don’t assume you can change what you’ve done by using a will.

That said, do write a will. Don’t die intestate. Even if you go the revocable trust route, you need a will to spell out what happens with the rest of your assets.

Did you know? A durable power of attorney can cover all assets, not just your trust. This avoids the need for a court to step in and name someone to manage your assets. Find out how to use a durable POA for a deed—and create it in 8 steps.