A Life Estate is a type of property ownership where one owner is deeded a property for the rest of his or her life, after which it automatically passes to another owner who was also named in the deed. The current lifetime owner is called the “life tenant,” and the successor is called the “remainderman.”
Most people are familiar with transferring property upon death through a will or a trust, or to take title to the property jointly with the intended beneficiaries, with rights of survivorship. Possibly a better way to transfer property at death is the life estate.
A life estate deed helps avoid the pitfalls of the other devices used to pass along ownership of property after death. With a will, you have probate proceedings; with joint ownership there is loss of control and liability; and with a trust, it is costly and complex. With a properly deeded title on a property, the estate plan is complete.
It is fairly simple to create a life. The deed would convey to the ‘current’ owner, or life tenant, the exclusive use and possession of the property for the rest of their life. Upon the life tenant’s death, the second named person, known as the remainderman, automatically gets the full title to the property. Under a life estate deed, both parties are considered owners of this property, but they have different types of ownership interests: the current owner has a life estate interest while the second named person has the remainder interest.
Because the life tenant and the remainderman both have ownership interests in the same property, the law has evolved to spell out the rights and duties each party owes to one another.
In most life estates, the life tenant and remainderman can only sell, convey, or mortgage their own respective interest, which limits either’s control of the property. While the life tenant has present use and possession of the property, they cannot sell, diminish, or cut off the remainderman’s future interest. Both the life tenant and remainderman would have act jointly together to sell or mortgage the property.
The life tenant is responsible for all costs of operating and maintaining the property, while the remainderman pays for any improvements to the property that is jointly agreed upon to make.
Common law restrictions on the rights of a life tenant may deter many property owners from using life estates as part of their estate planning. They would be fearful of losing control of their property, being unable to sell or mortgage the property if unforeseen circumstances should require, as well as incurring potential liability to the remainderman in their use of the property.
However, a property owner creating a life estate may enhance the powers of the life tenant and reduce the rights of the remainderman in the terms. It is this “enhanced life estate”, that allows for effective estate planning.
For example, a property owner can retain the power to sell, mortgage, lease and manage the property without the consent or joinder of the remaindermen. This lets the life tenant retain complete control over the property during their life, including the power to sell the property free of the remainder interest. The only power the life tenant cannot retain is the power to devise the property by will at death.
In addition, the life tenant can have the explicit right to retain lifetime use and possession of the property, which safeguards the life tenant’s right to enjoy homestead exemption for the property. Freedom from liability to the remaindermen for any waste to the property caused by the life tenant. This gives the life tenant maximum freedom of action to make use of the property any way he wishes during his lifetime, including demolishing improvements and depleting its assets.
Under the enhanced life estate concept, there is no guarantee that the remainderman will actually receive any remainder interest in the property, since the life tenant has the power to sell, gift or convey the property at any time. Or if there is a remainder interest left, that interest might be subject to a mortgage placed by the life tenant or diminished value due to the life tenant’s use of the property.
The important thing is that the enhanced life estate gives the property owner an effective estate planning alternative to wills, trusts, and joint property ownership. The enhanced life estate avoids the hazards of loss of control, uncertainty and exposure to liability involved in taking title to property as joint tenants with one’s intended beneficiaries.
An additional advantage to the life estate is that if the life tenant resides upon the property, the life tenant is entitled to treat the property as the life tenant’s homestead, both for purposes of protection against potential creditors as well as for homestead’s real estate tax exemptions and caps on assessment increases.
This article provides information that should be discussed with your attorney or financial planner, and in no way is intended as legal advice.