A life estate is a written device where two parties share custody of a home, allowing one party to live there until they die after which it is automatically passed on to the other owner. This document enables the holder of the life estate (many times an elderly parent) to pass the home to their children without having to go through the probate process. While the holder of the life estate is living in the home, they have control over the property and is responsible for maintaining the property. The life holder can also choose to rent out the property or make improvements as they see fit.
Even though the property is not included in the probate estate, it is included in the taxable estate. This means that, depending on the value of the home and the particular state’s tax limits, the estate may be liable for estate taxation.
If the life tenant wishes to sell or obtain a mortgage on the home, they need to get consent of the second owner, called the remaindermen. If it is agreed to sell the property, the proceeds are split up between the remaindermen and the life tenant. This is divided proportionately based on the age of the life tenant at the time of the sale. For example, the remaindermen will generally get a bigger share because they are younger than the life estate holder.
It is important to note that just because there is a Will does not mean you can get around going through probate. The only thing a Will does is direct the court how to divide up the items in your estate. A life estate in place has already added the children or heir’s names to the title of the home. It lists who the property belongs to after you die. In general, it is not necessary to go through probate when there is another owner listed on the title of the property. Remember, if you are the life estate holder (tenant) you are still responsible for:
- Paying the mortgage
- Keeping the property maintained
- Paying homeowner’s insurance
There are some problems that can occur with a life estate. For example, if the life tenant wants to sell the property, the children, including their spouses, must be in agreement on the sale. The same is true if the parent wishes to take out a mortgage or refinance the property. Their names cannot be removed from the title in order to sell or mortgage the property unless all are in agreement. The children may also request a portion of the proceeds if the property is sold.
If one of the children on the life estate owes back taxes or is sued, a lien could be attached to the property, meaning it could not be sold or mortgaged until the lien is settled. In addition, if one of the children files bankruptcy, the home is not protected because they are on the title.
A life estate will allow a parent to retain ownership in the family home while they are alive and lets the home pass on to the children when the parent dies. There are pros and cons to having a life estate which should be discussed with an experienced estate attorney such as the Estate Planning Lawyer Fairfield County, CT locals turn to prior to deciding whether or not this is the correct path to travel down.
Thanks to authors at Sweeney Legal for their insight into Estate Planning Law.