One of the most underused estate planning tools is a life estate deed (LED). Though LED’s should be used with caution, there are a number of goals it can satisfy versus making an outright transfer of home ownership to someone.
An LED is a deed that effectively and legally transfers real estate from one party to another. The parties to an LED are known as the “life tenant” and the “remainderman.” The life tenant is the current owner(s) of the property who transfers future ownership in the property to the remainderman, who is the beneficiary.
The life tenant reserves the right to remain in the home during their lifetime. Upon their death, the lifetime right of use and enjoyment of the property then terminates and the remainderman becomes the full owner.
There are a few common benefits of an LED:
• Avoids probate. Upon the death of the life tenant(s), the remainderman becomes the full owner of the property. The property associated with the LED keeps the home out of the probate process.
• Asset protection tool. An LED can serve as asset protection and Medicaid compliant tool protecting the home from nursing homes. Note that the deed transfer is still subject to the five-year lookback period.
• Guaranteed residency for life tenant(s). The life tenants have granted themselves the right to live in the property during the remainder of their lifetime.
• Less expensive. An LED is typically a less expensive tool than creating a revocable living trust or an asset protection trust.
• Remainderman’s creditors can make no current claim. The current creditors of your named remainderman cannot make a claim against the property that would affect your right to live in the home during your lifetime.
• Tax benefits. An LED offers the ability to get a “stepped-up basis” at capital gains upon a potential sale of the home after the death of the life tenant. The remainderman typically will receive the same tax treatment as if the property had passed to them at death with a stepped-up basis.
In addition, the life tenant continues to qualify for and receive many property tax exemptions during their lifetime (i.e. homestead exemption, senior citizen tax exemption etc.)
There are, however, some pitfalls of LED:
• Deceased remainderman. If one or more of your named remainderman dies, their interest in the property becomes part of their own estate.
• Sale of property. If the life tenant sells the property, the remainderman is entitled to share in the sale proceeds.
• Mortgage. If there is still a mortgage on the home, or the current owner wants to remortgage the home, a bank or lender may have an issue with a remainderman being on the deed. It’s recommended that prior written consent from a bank or lender is obtained before an LED is signed.
Overall, a life estate deed does offer many benefits, especially for smaller families or those whose primary assets are their homes. While this estate planning tool on its face might not be best suited for everyone, you should consider all of your options that may be available to you.
To learn more about life estate deeds and discuss your estate planning goals, contact an estate planning attorney.
Jada L. Gaines is an associate attorney with Elder Law & Estate Planning Center in Bluffton. hiltonheadelderlaw.com