Wealth can be built for generations. Property, valuable assets, personal belongings, and, most often, family homes are passed from parents to their children and so on. However, it is much more difficult for the family members to inherit the property without an appropriate legal document, such as trust, will, or life estate deed. In today’s article, we will focus on Life Estate Deed, its help to transfer ownership after the owner’s death and its impact on estate planning.
What is Life Estate?
A life estate is property – generally a home that an individual owns and may use for the rest of their life. The property ownership is shared jointly between two or more people, from whom one is the property owner – life tenant. When the owner dies, the property is automatically inherited by the people in the joint tenancy. Homeowners most commonly use life estates in the United States to ensure that the next generation inherits the family house and avoid probate, the legal process of proving a will.
Short glossary
Life Tenant
The life tenant is the individual who has the right to possess and use the property for the rest of their life. In other words, the life tenant has exclusive use of the property for the rest of their life. The property cannot be passed to his or her heirs. Instead, the property will automatically transfer to the remainderman upon the death of the life tenant.
Remainderman
The remainderman is the one person (or more) who has the ownership rights to the property after the life tenant dies. The remaindermen have no right to use the property during the life of the life tenant. However, that person is a receiver of the ‘remainder interest’ – the rights to the property after the previous owner’s death.
Measuring Life
The length of the life estate is determined by measuring life. The person whose death terminates the life estate is the person measuring life. The duration of the life estate is usually linked to the life of the life tenant. However, in some cases, the duration of the life estate can be linked to another measuring life, referred to as a ‘rule against perpetuities,’ which declares a property interest void unless it occurs within a specific time frame.
Life interest
The life tenant has some restrictions as well. A life tenant, for example, cannot sell the property outright, but they can sell their life interest in the property. This means that the buyer will own and be responsible for the property for the life of the tenant. If the life tenant wishes to mortgage the property, all parties must agree and sign the mortgage.
What are the types of Life Estate Deeds?
The deed is a written document that transfers property title (or ownership) from one person to another. This legal document must be recorded in the county’s Circuit Court, where the property is located with the Land Records. The Life Estate Deed is one of several options for granting others certain rights to your property. The specific words used in the life estate deed are essential because they can define the eligibility and validity of the document.
There are two types of life estate deeds:
Traditional life estate deed
Enhanced life estate deed (also known as Lady Bird Deed)
In today’s article, we will lead you through both of the life estate deeds and cover subsequently:
- How does Traditional Life Estate Deed work?
- The benefits and risks of Regular Life Estate Deed
- The rules of Enhanced Life Estate Deed
- The advantages and disadvantages of Lady Bird Deed
Traditional Life Estate Deed
The property is divided into two types of interests by life estate deeds. A life estate is a single interest that is measured over the owner’s lifetime. A remainder interest is an interest that passes upon the death of the life estate holder. The remainder interest and life estate are then transferred to different owners.
Types of owners in Life Estate Deed
Current Owner (Grantor) – The grantor is the person who creates the deed.
New Owner (Life Tenant) – the property owner
Future Owner (Remainder Beneficiary) – The remainder beneficiary or remainderman is the person who will inherit the house when the life tenant dies.
But what do Life Estate Deeds mean for the life tenant?
The life tenant retains the majority of the rights and obligations of a homeowner. The life tenant has the option of living in the home or renting it out and is responsible for all taxes, insurance, and maintenance costs. Any tax advantages of homeownership accrue to the life tenant as well.
However, the life tenant does not have the right to sell the property or mortgage it without the remainderman’s permission. On the other hand, remainderman becomes a joint owner of the property but has no complete control, nor legal right, to live in or use it until the original owner passes away.
The advantages and drawbacks of a Regular Life Estate Deed
A life estate is a tool for estate planning. The primary reason for establishing it is to ensure that a home is transferred to the appropriate person immediately following the life tenant’s death, avoiding probate. Besides the option to avoid the probate process, Life Estate Deed comes with many other benefits.
For example, there is no will needed to manage the property of the deceased person, and that can be a huge emotional relief for the life estate owner and an essential element of estate planning. They know exactly what will happen with the property after their death. The Life Estate Deed ensures that property passes to the remainderman.
Unfortunately, it is not only sunshine and rainbows. There are a few downsides to choosing Life Estate Deeds. The life estate holder loses control over their real estate. As mentioned before, during the owner’s life, one cannot sell the property or decide what happens to it without consulting the remainderman.
Unlike a will, life estate deeds cannot be changed that easily. It would require the property transfer by remainderman back to the owner. Last but not least, property taxes need to be paid for the entire measuring life.
Enhanced Life Estate Deed
A Florida Lady Bird Deed, also known as an Enhanced Life Estate Deed, is one of the state’s newest and most important estate planning tools. This relatively new type of deed, known more formally as an enhanced life estate deed, allows the house to pass automatically to designated beneficiaries upon death. Lady Bird Deed is a legal way to divide property ownership into an enhanced life estate and a remainder interest.
The Florida Enhanced Life Estate Deed is an excellent estate planning tool because it allows a person to qualify for Medicaid while retaining the homestead. Using a standard life estate deed can frequently disqualify a person from receiving long-term government assistance.
The key feature of the Florida Life Estate Deed
The Florida lady bird trust allows the person who owns the property’s life estate to retain far more property rights. The Lady Bird Deed allows the property to avoid probate. Unlike a traditional life estate, the Lady Bird Deed gives the original owner the right to use and profit from the property during his or her lifetime, as well as the right to sell the property at any time. Another significant advantage is that it allows the grantor to avoid making a gift subject to the federal gift and estate tax. The Lady Bird Deed may also prevent the property from being sold after the holder’s death to repay the cost of Medicaid benefits received.
Advantages and disadvantages of the Enhanced Life Estate Deeds
There are many advantages to the Ladybird Deed. It is definitely less expensive than a trust. Because of the unique characteristics of this type of deed, it may be more expensive to prepare than a standard deed. Moreover, there is no immediate transfer of ownership, no documentary stamp taxes are due on the recording of a Lady Bird Deed, even if the property is encumbered by a mortgage.
There are also a few drawbacks. A creditor may be able to place a lien or levy on the Lady Bird Deed’s remainder interest. It cannot be used to disinherit a spouse or minor child. What is more, if the remainder interest holder dies before the life tenant, it may be legally unclear what happens to the property when the original life tenant dies later. Furthermore, it is only permitted in a few states: Florida, Michigan, Texas, West Virginia, Vermont.
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Final thoughts
We hope we brought the topic of Life Estate Deed closer to you and made it less complex.
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