What is a Life Estate Deed?
A Life Estate Deed is a special deed form that allows a property owner to use the property during life and transfer the property automatically at death. Life Estate Deeds are designed to transfer the property at death without losing the ability to use the property during life.
How Life Estate Deeds Work
To understand how Life Estate Deeds work, it is important to make a distinction between ownership and possession. You can possess something without owning it, and you can own something without possessing it. Life Estate Deeds work by creating different categories of ownership that have different rights of possession.
When property is transferred by Life Estate Deed, ownership is divided into two types of interest: life estate and remainder interest. The owners who hold these two types of interest are truly owners of the property, but they have different rights of possession. One interest is measured based on the owner’s lifetime and is called a life estate. The person who holds a life estate has the right to possess the property during his or her lifetime. The interest that passes at the owner’s death is called a remainder or remainder interest. The person who holds a remainder interest does not have the right to possess the property until the life tenant’s death.
The Life Estate Deed transfers the two different types of interest (the life estate and remainder interest) to different owners. There are three categories of owners:
- Current Owner (Grantor) – The person creating the deed is called the grantor.
- New Owner (Life Tenant) – The person who owns the life estate is called the life tenant.
- Future Owner (Remainder Beneficiary) – The person who will acquire the property when the life tenant dies is called the remainder beneficiary or remainderman.
As with other deeds, these terms refer to different types of owners, not to specific individuals. The same party may serve in multiple roles. The current owner (grantor) is usually also the life tenant. Similarly, multiple individuals may serve in the same role. For example, there may be two grantors, three joint life tenants, and one remainder beneficiary.
Example: Peter creates a life estate deed transferring his property to himself, as life tenant, with the remainder to Paul and Mary. The effect of this deed is to retain a life estate for Peter as life tenant. At Peter’s death, the remainder interest will automatically transfer to Paul and Mary.
After the Life Estate Deed is filed, the life tenant and the remainder beneficiaries own the property, but have different possession rights. The life tenant continues to possess the property during his or her lifetime, and the right to possess the property passes to the remainder beneficiaries when the life tenant dies.
How to Create a Life Estate Deed
The creation of a Life Estate Deed can be tricky. It is important to include the right language to create the life tenant relationship. If multiple parties will serve in the same role—for example, if there are multiple life tenants or multiple remainder beneficiaries—it is important to also include language that defines the relationships within that role, including the form of co-ownership for multiple remainder beneficiaries.
Comparison to Other Deed Forms
A Life Estate Deed is not the only way to transfer property at death. Property will automatically transfer to the surviving owner at death if it is titled as tenancy by the entirety, joint tenants with rights of survivorship, or community property with rights of survivorship. With these forms of co-ownership, the owners hold title at the same time.
A Life Estate Deed is also a form of co-ownership. Both the life tenant and the remainder beneficiary have real interests in the property. But unlike other forms of co-ownership, they do not have property rights at the same time as each other. Instead, their interests are stacked in time. Only the life tenant has a right to current possession of the property. The remainder beneficiary’s interest does not begin until the life tenant’s death.
Ways to Structure a Life Estate Deed
There are several ways to structure a life estate deed. You could, for example, create a life estate in which the life tenant’s interest is based on someone else’s life (called a life estate pur autre vie). But these types of structures are more common in theory than in practice. In practice, there are two common ways to structure Life Estate Deeds:
- Grantor Retains Title as Life Tenant – The grantor may transfer the property from herself as the sole owner to herself as life tenant, with the remainder to pass to the remainder beneficiary upon the grantor/life tenant’s death. In this scenario, the same individual is playing the role of grantor and the role of life tenant.
- Grantor Transfers to New Life Tenant – The grantor may transfer property to a third-party life tenant (often a child) and provide for the remainder to pass to yet another person at the death of the life tenant. In this scenario, the roles of grantor, life tenant, and remainderman are all played by different people.
Most Life Estate Deeds use the first option, where the grantor retains an interest as a life tenant and transfers the remainder to someone else. This is due to the context in which Life Estate Deeds are used. In most cases, a person creates a Life Estate Deed in order to transfer property to family members at death without probate. The person that creates the Life Estate Deed usually wants to keep the right to use the property during life.
Common Uses of Life Estate Deeds
There are several reasons why people want to transfer property to someone else at death while, at the same time, keeping rights to use the property during life. These reasons include:
- The ability to transfer the property without having to go through probate;
- The ability to continue to live in the home during life if the property is residential;
- The ability to collect rent from the property if the property is leased;
- The ability to farm the land (or lease it out for farming) if the land is farmland;
- The ability (in some states) to preserve homestead tax benefits, including creditor protection and property tax savings;
- The ability to transfer the home in a transfer that will not count against the original owner if he or she files for Medicaid (depending on state Medicaid law); and
- The ability to keep the home from being subject to Medicaid claims for reimbursement at death (depending on state Medicaid law).
Some of these goals can also be accomplished with Lady Bird Deeds or Transfer-On-Death Deeds. As discussed below, Lady Bird Deeds or Transfer-On-Death Deeds provide many of the benefits of Life Estate Deeds, but give the grantor/life tenant broader rights to use the property.
Alternatives to Life Estate Deeds
Life Estate Deeds give the remainder beneficiaries immediate ownership of the property. Although that ownership is not possessory until the life tenant dies, it is a true ownership interest. That means that the original grantor (who is now the life tenant) must convince the remainder beneficiaries to cooperate in any sale, mortgage, or lease of the property. And if the property is sold, the remainder beneficiaries receive a portion of the sale proceeds and must pay a portion of the income taxes on the sale.
This loss of control is a significant problem that causes most people to choose living trusts over Life Estate Deeds. But living trusts are significantly more expensive than deeds. Many states have allowed alternative forms of deeds that accomplish the goals of Life Estate Deeds without the drawbacks. These alternative deed forms include Enhanced Life Estate (Lady Bird) Deeds and Transfer-On-Death Deeds.
A Lady Bird Deed combines a traditional life estate with enhanced rights to use the property. Like a traditional Life Estate Deed, a Lady Bird Deed allows the grantor to keep a life estate and have the property pass automatically to the remainder beneficiaries at the owner’s death. But a Lady Bird Deed also gives the grantor enhanced rights, including the right to sell or gift the property and keep the proceeds.
Lady Bird Deeds are a great alternative to both traditional Life Estate Deeds and living trusts. Unfortunately, though, they are only available in five states: Florida, Texas, Michigan, Vermont, West Virginia.
A Transfer-On-Death Deed (also called a Beneficiary Deed) has the same benefits as a Lady Bird Deed and works the same way as a beneficiary designation on a bank account. It allows the grantor to transfer property at death while retaining complete rights to the property during life. The grantor can sell property, change the beneficiaries, or even completely revoke the Transfer-On-Death Deed, all without involving the remainder beneficiary. In fact, the remainder beneficiary does not even need to be informed that the Transfer-On-Death Deed exists. Transfer-On-Death Deeds are now recognized in most—but not all—U.S. states.