A life estate continues to be one of the most popular ways of owning properties. This guide focuses on a life estate. Read on to learn how this property ownership concept works.
Understanding a Life Estate
A life estate can be considered a joint ownership, where one individual purchases a property and then shares ownership with another person. The person who buys the property is known as a life tenant, while the other person is called a remainderman, who automatically receives the property’s title in the event the life tenant passes away.
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Many people prefer owning a property through a life estate to avoid the complex process of distributing assets and proving a will.
It is important to mention that in most cases, a life tenant cannot sell their property or use it as collateral against a loan without receiving the remainderman’s approval. Also, the life tenant is responsible for paying costs associated with owning the property, such as insurance, maintenance, and taxes.
A life estate agreement between two individuals is recognized legally on a deed, which states the name of the person to own a particular property after the death of a life tenant. A life estate deed erases the need to write a will. Moreover, it ensures that the property isn’t subject to the probate process, which can be extremely costly.
Life Estates As an Income Stream
While the main goal of the life estate is to make the transfer of property ownership seamless, it can be used to create an income avenue. Here is how: Instead of residing in your property, you can rent it to receive monthly income for life. Note that the remainderman is allowed to demand a percentage of the generated revenue. Depending on your age, the remainderman may receive a bigger portion of the revenue than you.
How Do you Create a Life Estate?
Here are the three steps to follow to create a life estate:
1. Consult a real estate lawyer: You need a legal professional familiar with the estate laws to help you create a life estate.
2. Draft the life estate deed: With the help of your real estate lawyer, draft the deed of the property to be owned through a life estate. This involves specifying the name of your ideal remainderman.
3. Submit your life estate deed to the relevant authority: To ensure the deed is legally recognized, you must submit it to offices of the land registry in your country.
Alternative to Life Estate
Besides life estate, there are other options to pass on the ownership of your property to the next generation. They include:
1. Transfer-on-death-deed – Having this deed attached to your property allows your heir to take ownership after you pass away. You can change the name of the heir any time you want.
2. Revocable living trust – By placing your property in this trust, you are essentially protecting it from going through probate.
3. Irrevocable living trust – You cannot change or revoke this trust once you place your property into it. That also means you cease to become the owner of that property. However, an irrevocable living trust protects it from being taxed.
Types of Life Estate
A Life estate is divided into two: enhanced and traditional. The difference between enhanced and traditional deeds is that the former allows a life tenant to sell their property or borrow a loan against it without the consent of the remainderman.
Pros and Cons of Life Estate
Pros
1. Life estate makes the transfer of property ownership easy.
2. It protects the property from the deceased’ debtors.
3. It helps relatives of the deceased to avoid unnecessary quarrels over the property.
Cons
1. A Life tenant may be subject to debt actions leveled against their remainderman.
2. In most cases, life tenants are restricted from selling their properties without the approval of the remaindermen.
3. A life estate is difficult to change when the life tenant wants to remove the remainderman.