What is a life estate deed?

A life estate deed is a legal document that changes the ownership of a piece of real property.

The person who owns the real property (in this example, Mom) signs a deed that will pass the ownership of the property automatically upon her death to someone else, known as the "remainderman" (in this example, Son). As part of the deed, Mom keeps what is called a life estate, which means she can continue to live on and use the property for the rest of her life.

She becomes a "life tenant." The deed would normally include language like "to Mom for life, to Son as the remainder."  The life estate deed is completed when Mom signs the document and it is filed with the county.

Benefits of a life estate deed

There are many benefits to creating a life estate deed, sometimes called a life estate trust:

• Avoid probate. Mom gets to pass her property to Son without its having to go through probate. When she dies, he becomes the owner without a court proceeding
• No will necessary. Mom doesn't have to include the property in a will. She signs the deed and it's done.
• Emotional relief. Mom signs the deed and knows that she doesn't have to worry about what is going to happen to the property after her death.
• Avoid gift tax. Using a life estate property deed can be preferable to an outright gift from Mom to Son during Mom's life, because that could be subject to gift tax.
• A place to live. A life estate deed is often used to provide housing for someone until they die. Mom might own a home in her own name and create a life estate deed that gives her much younger husband (Stepdad) a life estate in the property so Mom can be assured he will always have a place to live. She can leave the remainder to Son, so he will get his inheritance once Stepdad dies.

The drawbacks of a life estate deed

In addition to benefits, there are some drawbacks that should be considered before deciding on this course.

• Loss of control. While Mom gets to live ion the property for the rest of her life, she can't sell it to anyone, take out a mortgage, or control what happens to it after her death. If Son dies before Mom does, his heirs become the remainderman in his place. This might not be what Mom intended, yet she has no control over it.
• No easy reversal. A life estate deed is a legal transfer of title in the property. Mom can't undo it if she changes her mind, unless Son agrees to transfer it back to her.
• Property taxes. Mom must continue to pay property taxes on the home during her life, which would not be the case if she gifted or sold the property to Son during her lifetime.

Other ways to achieve similar results

There are other ways to achieve the same outcome as a life estate deed:

• Revocable trust. Mom can place the property in a revocable living trust with Son as the trust beneficiary. By doing so, Mom transfers ownership of the home to the trust, yet she can continue to live there the rest of her life. Mom can set up the trust to distribute the home to Son upon her death. She still avoids probate, yet she has the power to make any change she wants to the trust (including canceling it entirely or changing beneficiaries) at any point in her life.
• Sell the property. Another option is for Mom to sell the property to Son during her life. Mom gets the money, which could be used for her care, and Son could agree to let her live there rent-free.
• Last Will and Testament. It is also possible to create a life estate in a will. Mom could leave Stepdad a life estate in the property in her will, with remainder to Son.