What Life Estates Are, And How They Work

what life estates are and how life estates work

A life estate is a legal arrangement where the owner of a property (the grantor) gives the house, structures and/or land to another person while retaining the right to live and use it while they remain alive. Life estates are a great way for people who are aging, or that have terminal illnesses to gift their property to their heirs while getting to use it, and avoid hassles after they pass.

Best of all, a will may not be needed for the property transfer because of the joint ownership.  In addition to having less issues with the transfer after you die, a life estate protects your home from Medicaid estate recovery

There are both pros and cons with a life estate, but whether or not it is advantageous for you depends on your circumstances.  

The Advantages and Disadvantages to Life Estates

In many situations, life estates are helpful.  However, when things are complicated, a life estate can create problems for everyone involved.  Here are the pros and cons to life estates so you can apply the benefits and negatives to why you’re looking into creating one.

Life estates are a good idea when you:

  • Want to simplify the estate planning process.
  • Wish to live in your home until you die.
  • Still would like to take advantage of tax breaks like the reduced homestead in Iowa or senior tax exemptions in New York
    • These benefits are available in most states, check your state’s website for which apply to you.
  • Would like to try and avoid probate so your beneficiary will receive the property faster.
  • Are trying to lower your beneficiary’s tax burden when you die with reduced capital gains taxes (read more here.)

The downsides of a life estate include:

  • Losing the ability to make major decisions regarding the property without input from the beneficiary. 
  • The proceeds from a sale (before your death) will be split.  Your share is determined based on your age at the time of the sale, and the older you are, the smaller your share will be.
  • Your home is not protected from litigation, liens, divorce, or bankruptcy of the beneficiary.  
  • You are still responsible for making property tax payments, insurance payments, and maintaining the property while you are alive.
  • You’ll have a Medicaid ineligibility period if you apply for Medicaid within five years of the transfer.
  • Can’t revoke the life estate without the beneficiary’s consent.  
  • If the beneficiary passes away before you, the home may have to go through probate of the beneficiary’s assets and will.

How A Life Estate Works

If you are considering creating a life estate, here is how the process works:

  1. You establish a life estate (which makes you a life tenant and whoever you are gifting your home to the beneficiary).  
  2. Continue to live in your home until you die.  
  3. The beneficiary files a copy of your death certificate with the county to transfer ownership. 

How To Create A Life Estate  

Now that you’ve decided a life estate is what you need, there are only three steps you’ll need to follow:

  1. Hire a licensed attorney to walk you through the process of creating your life estate.
  2. Draft your life estate deed while including the date, your name and address, the beneficiary’s name and address, description of the property, and everyone’s signatures.
  3. Get the life estate deed notarized and file/record it with the county recorder’s office.

Owning your own home, and being able to pass it onto your loved ones is the American dream.  And life estates can help take the stress from any complications after you die, and protect you while you’re living.  And when you’re ready to close, we’re ready to be your title company, or do a title search after to make sure everything has been recorded properly.

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