We have highlighted common instruments (such as trusts, wills, and powers of attorney) that individuals may use in forming their comprehensive estate plan. A lesser-known instrument for transferring property that some may wish to consider is a life estate deed. In short, this document grants interest in real property to one person during his or her lifetime, while also granting ownership interest in the property to another individual, who immediately receives the property upon the life tenant’s death.
What is it?
The following definitions are helpful to understand the concept of a life estate deed:
- Grantor: current property owner who creates the deed and agrees to transfer ownership in the property.
- Life tenant: the person to whom the grantor transfers ownership of the property. This individual owns the property for the duration of his or her lifetime.
- Remainderman: the future owner of the property upon the death of the life tenant. A remainderman may be a single person or multiple people.
In a life estate deed, a grantor gives a “life estate” in “immovable property” to a life tenant. The life tenant maintains ownership over this property for the duration of his or her life. “Immovable property” is real property that cannot be moved from one place to another. “Real property” includes any fixture above the land, such as a house, and anything below the land, such as minerals. Upon the life tenant’s death, the immovable property automatically passes to another designated individual, the remainderman. Generally, the life tenant is the original owner of the property to be transferred. For example, Mom has a home that she wants to leave to her daughter when she dies, but Mom still wants to occupy the house while she is alive. Mom can execute a life estate deed in which she transfers the property to herself, as the life tenant, and her daughter, as the remainderman. Mom retains ownership of the house and can live in it until she dies, at which point the property passes automatically to the daughter.
Both the life tenant and the remainderman have an ownership interest in the property, but the remainderman has no legal right to possess the property while the life tenant is living. Importantly, the life tenant retains complete control over the property during his or her lifetime. The life tenant has the right to use the property, rent it out, and make improvements to it. Because the life tenant maintains control over the property, he or she remains legally responsible for it as well and must pay any mortgage on the property as well as homeowner’s insurance.
The only way in which a remainderman could take possession of the property during the life tenant’s lifetime is through express permission from the life tenant.
Traditional v. Enhanced
There are two types of life estate deeds: traditional and enhanced (sometimes called a Lady Bird Deed). Both deeds: (1) accord the life tenant the right to occupy the property throughout his or her lifetime; and (2) pass ownership of the property to the remainderman upon the life tenant’s death.
However, there are two important distinctions between the deeds. In an enhanced life estate deed, the life tenant may: (1) sell the property or take a mortgage against it without consent from the remainderman; and (2) revoke the enhanced life estate deed. In a traditional life estate deed, the life tenant cannot take such actions. It is important to understand that if a traditional life estate deed is created, the life tenant cannot revoke or change the remainderman without the remainderman’s consent. Similarly, under a traditional life estate deed, the life tenant would be required to obtain consent from the remainderman if he or she desired to sell the property or mortgage it.
Enhanced life estate deeds are currently only available in Florida, Michigan, Texas, Vermont, and West Virginia. However, enhanced life estate deeds are similar to Transfer on Death Deeds, which are available in more states. For this reason, it is important to consult a real estate or estate planning attorney in your area before creating a life estate deed.
Creating a Life Estate Deed
Creating a life estate deed is fairly simple, and a real estate or estate planning attorney should be able to draft one for you. The owner of the property to be transferred, the grantor, creates a new deed in which he or she transfers their ownership interest in the property to the life tenant, for use during the life tenant’s lifetime. Often, the grantor and life tenant are the same person, and we assume as much for purposes of this article. The deed will generally declare that the life tenant may occupy the property for the remainder of his or her life. The deed will also name the remainderman who will become the owner of the property upon the life tenant’s death. Common language in the deed includes “to Mom for life, to Daughter as the remainder.”
Because a life estate deed transfers title (ownership) of real property, the life estate deed must be properly recorded like any other deed. To record a life estate deed, you (or your attorney if you have hired one) would take the deed to the public records office for the county in which the property is located (usually the register/recorder of deeds or county clerk’s office) and pay a small fee.
At Life Tenant’s Death
As discussed above, one of the main benefits of a life estate deed is that the property passes from the life tenant to the remainderman immediately upon the life tenant’s death, skipping probate. Generally, the only required action upon a life tenant’s death is the filing of the death certificate with the registry of deeds. The remainderman enjoys immediate possession of the property.
Which Estate Planning Instrument Controls?
Because the property passes automatically upon the life tenant’s death, the life tenant has no control over the property once he or she has died. Therefore, even if a life tenant created a will and bequeathed the property, which was subject to a life estate deed, to a beneficiary in the will, the life estate would prevail, and the remainderman would retain ownership over the property.
Contesting Life Estate Deeds
Generally, life estate deeds can be contested in the same manner as other estate planning instruments. Common contests include alleging that the grantor was coerced into creating the life estate deed, that the grantor lacked the mental capacity to create the deed, or that the deed is fraudulent.
Because the life tenant retains control over the property during his or her lifetime, the life tenant is responsible for its property taxes. Further, while a life estate deed automatically transfers the property to the remainderman without having to go through probate, the property transferred remains a part of the life tenant’s estate for taxation purposes. Therefore, depending on the size of the estate and the tax threshold in the state where the life tenant died, the property may be subject to an estate tax. However, the life tenant of the property generally will not incur a gift tax on the property because he or she is granting the home at his or her death, not during their lifetime.
Life Estate Deeds and Medicaid Implications
One advantage of the life estate deed is that it is generally exempt from Medicaid rules concerning the sale and/or recoupment of property for Medicaid benefits paid. A homeowner who spends their later years in a long-term care facility but owns property under a traditional deed may be forced to sell the property before he or she may be eligible for Medicaid assistance. However, if the owner transferred their ownership rights via a life estate deed more than five years before moving into a long-term care facility, the government generally cannot force the owner to sell the property.
If the property owner was a Medicaid recipient during his or her life, upon his or her death, Medicaid may seek reimbursement from their estate for payments made on their behalf. As Medicaid is a federal program, federal law requires all states to have an “estate recovery program” to recoup benefits Medicaid paid. However, some states only recapture benefits from probate estates, and because property transferred via a life estate deed is not generally considered part of a probate estate, such property may be exempt from Medicaid reimbursement.
Consulting a Qualified Attorney
The above information is merely an overview of life estate deeds. State laws concerning life estate deeds and enhanced life estate deeds differ. Further, each individual’s estate is different, and one estate planning tool may work well for one person, but not another. Therefore, it is important to research your estate planning options and consult a qualified attorney to help you achieve your specific, comprehensive estate plan.
- What is a Life Estate?, Elder Law Answers, https://www.elderlawanswers.com/what-is-a-life-estate-15771
- Real Property, Wikipedia, https://en.wikipedia.org/wiki/Real_property
- What is a Life Estate?, The Balance, https://www.thebalance.com/what-is-a-life-estate-and-when-will-i-need-one-4165966
- What is an Enhanced Life Estate Deed?, The Balance, https://www.thebalance.com/enhanced-life-estate-deed-3505518
- Using a Lady Bird Deed in Estate Planning, Legal Zoom, https://www.legalzoom.com/articles/using-a-lady-bird-deed-in-estate-planning
- Life Estate Deeds Explained, Wealth Management, https://www.wealthmanagement.com/estate-planning/life-estate-deeds-explained