Both the owner and the heir of an estate have the potential to end up benefiting from a life estate deed. Despite these potential advantages, many people do not know what a life estate deed is.
A life estate deed is a real estate arrangement that contains two distinct phases. During the first phase, the property owner owns the real estate for the life. In the second phase, upon the death of the property owner, a remaining interest in the property is transferred to someone else.
The owner of a “life estate” in a piece of property possesses the right to live on and use a property as long as the property holder is alive. A person who receives the interest in this property is then prohibited from interfering with the life estate holder’s use of the property.
The Advantages of Creating a Life Estate
Besides the security that comes from owning a property and using it as a person sees fit for their life, a life estate deed provides a number of other advantages, which include the following:
- Immediate transfer without probate. On the death of the life estate owner, full ownership of a property is immediately transferred to the designated party. Even if other assets must pass through probate following a person’s death, designated parties will not be required to wait before they can begin occupation of a home.
- Rental income. Some life estate owners decide to live somewhere else while they still own the property. In these situations, it is possible to rent out a home, which would then entitle the real estate owner to 100% of the rental income.
- Capital gains tax advantage. If a life estate owner transfers a piece of property to someone while still alive, the recipient’s tax basis in this property will be the same as the donor’s tax basis at the time of the transfer. Transferring a life estate deed, however, results in the remainder owner’s tax basis in the value of the home at the time of death being reduced or eliminated.
Downsides to Utilizing a Life Estate
There are a few disadvantages to a life estate. Some of the downsides to life estates include:
- Life estates are often particularly difficult to alter once they are created
- If a person moves into an extended care facility within five years of creating a life estate deed, Medicaid still sometimes requires the sale of the home.
- Even though the right of a tenant to live in a home under a life estate deed is absolute, if the remainder owner encounters financial or legal problems, this could create substantial problems with ownership of the home.
- If the remainder owner dies before the life estate holder, the property might be required to pass through the probate process.
Speak with an Experienced Real Estate Lawyer
If you are interested in creating a life estate or engaging in any other type of real estate planning, do not hesitate to contact experienced attorney Jim A. Lyon today.
During a free case evaluation, attorney Lyon can help you review the various available estate strategies to determine what would be most beneficial to you. Contact our office today for assistance.