Should You Consider a Life Estate for Your Home?
A home is often one of the most valuable items of property that someone will ever own. When it
comes to ensuring that your home passes to the individual or group that you intend, there are a
variety of ways to legally make that happen. The life estate is a less commonly used method.
What is a life estate?
A life estate, sometimes called a right of occupancy, is a property law concept that allows a
property owner to split their interest in real estate and other types of property into different types
of ownership that can exist simultaneously. For example, the owner of a cabin could legally split
their ownership interest in the cabin, allowing them to possess and enjoy the cabin for the
remainder of their life and then, at death, automatically pass full ownership of the cabin to a
named individual.
Lady Bird or Enhanced Life Estates
When you create an ordinary life estate in a traditional life estate property deed, you are creating a
type of joint interest in that property that cannot be undone without the joint owner’s consent.
For example, if you created a life estate for yourself in your own property with the remainder
interest passing to your sibling at your death, you could not sell or borrow against the property
without your sibling’s consent. Likewise, if you decided that you were angry with your sibling and
wanted to make someone else the property’s remainder beneficiary, you could not change the
remainder interest without your sibling’s consent.
In some states, including Florida, however, Enhanced Life Estate Deeds, also known as Lady Bird Deeds, are permitted. This type of deed is distinct from an ordinary Life Estate Deed (also allowed in Florida) in that the grantor retains all rights of full ownership during their lifetime. With an ordinary Life Estate Deed, if the grantor wishes to sell or mortgage the property, the person(s) holding the remainder interest (the right to ownership after the life tenant dies) must agree to that action and must sign all sale or mortgage documents. In contrast, with an Enhanced Life Estate deed, the grantor/life tenant retains the right to sell or mortgage the property without the cooperation or consent of the remainderman.
How to Create a Life Estate
Using a life estate deed is one way to establish a life estate in your home. This type of deed
must be drafted carefully to identify who will own the life interest (the right to possess and enjoy
the property during their life) and who will receive the remainder interest (the right to receive the
property when the individual owning the life interest dies).
Once a life estate deed is properly drafted, signed, and notarized, it should be recorded in the
appropriate land records office to give it full legal effect. After recording the deed, the individual
with the life interest (or life estate) can use and enjoy the property throughout the remainder of
their lifetime. Note that the life interest holder is typically responsible for maintaining the property
as well as any property tax liabilities.
Using a trust is another way to create a life estate. For example, a property owner could title
their home in the trust’s name and, through the trust language, designate who will have the right
to use and enjoy the property during life and who will receive the home at the life interest
holder’s death.
Benefits of Using Life Estates
Probate avoidance. Whether you are using a life estate deed or a trust to create this type of
split interest in property, probate avoidance is one of the major benefits. Probate is often an
expensive, time-consuming, and public process for passing accounts and property to your loved
ones. Using a life estate deed or a trust as a part of your estate planning can be an effective
way to avoid involving your state’s probate court system in passing your property on to the
individuals and groups that you want to receive it. Beyond merely avoiding probate, life estates
can create additional flexibility in how you pass your property on to your loved ones by resolving
competing interests among beneficiaries.
Second marriages. A life estate can be particularly helpful when someone in a second (or third
or fourth) marriage wants to allow their new spouse to continue to live in the family home until
the spouse dies (life interest), with the home ultimately passing to the original owner’s children
(remaindermen). This arrangement can ensure that both your current spouse and your children
from an earlier marriage can enjoy the property as you intend, rather than the property passing
to someone whom you never intended to receive it (such as a new spouse who comes into the
picture after you have died or your stepchildren instead of your own children).
Potential Drawbacks of Life Estate Deeds
Even though there are some definite benefits of using life estates in your planning when the
situation calls for it, there are also some potential drawbacks that you should consider.
The individual owning the life interest will generally be responsible
for the expenses associated with maintaining the property, including taxes. If the life interest
owner is unable to afford such expenses, the remainder beneficiaries may not receive their full
interest at the lifetime beneficiary’s death because there may be tax liens or other
encumbrances on the property before it can pass via the remainder interest.
Third, a pure life estate interest does not protect the remainder interest from the remainder
beneficiaries’ creditors. For example, if the life interest owner dies when a remainderman is
going through a lawsuit, a bankruptcy, or a messy divorce, that person’s remainder interest
could easily be seized by an opposing party to satisfy the remainderman’s debts or other legal
obligations. In such a case, a trust with asset protection provisions would be a more effective
tool for protecting the remainder beneficiaries’ interests from such threats.
Conclusion
Life estates and Enhanced Life Estates/Lady Bird Deeds can be an effective and straightforward method for accomplishing certain estate planning goals, but they are not necessarily the right tool for all situations. Call or schedule an appointment with us here at Robert J. Warren, P.A. to determine whether life estates make sense in your particular situation and to get help properly implementing this powerful strategy.