What Is a Life Estate Deed?

A life estate deed is a legal document used in real estate to grant ownership of property to an individual for the duration of their life. When that individual passes away, property ownership automatically transfers to another person or entity of the original owner's choosing. A life estate can ensure your property will transfer to your chosen recipients.

How does a life estate work?

A life estate is a type of holding where you divide ownership into two phases: a life estate and a remainder. As a property owner, you change the ownership so that you only hold the property during your lifetime. This means nothing will be left of your interest to pass on to someone else, such as through your will.

The second phase of ownership is the remainder. The person who owns the remainder takes possession when the life tenant dies. They have an ownership interest during the life tenant's lifetime but do not take possession until that person dies. An example would be where a mother sets up her home, so she has a life estate with her son having the remainder.

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 on 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.

Types of life estates

Life estate types include:

• Life estate with remainder: As described above, the life tenant has ownership and possession during their lifetime, and the remainderman has an ownership interest but does not take possession until the life tenant's death.
• Life estate with reversion: The property owner grants someone else a life estate in the property. When that life tenant dies, the property reverts back to the original owner. A son could give his mother a life estate in his vacation home, and she could live there for her lifetime. When she dies, the son has full ownership.
• Life estate pur autre vie: This type of life estate lasts for the length of one person's life, but it is not the lifetime of the tenant. This is commonly used to provide for a disabled adult child. The parents leave a life estate to the child's caretaker that lasts for the child's life so the child has a place to live. Once the child dies, the property reverts back to the parents' estate.
• Homestead: This life estate is created to protect a home from creditors. For example, in bankruptcy law, state laws may allow you to designate your home as a homestead so that it is not accessible to creditors.

How to create or dissolve a life estate

A life estate is created by executing and filing a new deed for the property that specifies the life tenant and remainderman. If you are considering setting up a life estate, you should know that it can be challenging to dissolve one once you set it up.

To dissolve a life estate, the life tenant can give their ownership interest to the remainderman. So, if a mother has a life estate and her son has the remainder, she can convey her interest to him, and he will then own the entire interest in the property.

If she wants to actually undo the life estate and get back her ownership of the property, her son must be willing to deed his interest back to her. However, if he doesn't want to do so, his mother has no recourse.

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 for 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.