Using A Life Estate To Avoid Probate
When we transfer real property, we often think of it in terms of just buying or selling. But there are other forms of transferring your property which can have a benefit to you now as well as after you pass. One way, which can also help you avoid probate, is the “life estate.”
When you create a life estate in property that you own, you are essentially splitting ownership of that property, without actually selling the property to someone else. You will retain ownership of the property, as what is known as a “life tenant,” and the other person who will now have part ownership in the property will be called the “remainderman.”
As an owner who becomes a life tenant, your status does not really change. You still have the right to live in the property, rent free, and do whatever you would normally do with property that you own. You have the right to collect all rents from the property, if it is rented out. However, you cannot simply sell the property when you want to absent the remainderman’s consent. You will also need the remainderman’s consent to lien the property, such as if you wanted to take out a second mortgage.
On the other hand, Florida and a few other states recognize an “enhanced life estate” which allows the life tenant to do whatever he/she wants during his/her lifetime without needing consent from the remainderman. This is sometimes referred to as a “Lady Bird Deed.”
When you as the Life Tenant pass, the property will automatically transfer to the remainderman (or remaindermen, if there is more than one person named). Once that happens, the remainderman is the true, full and complete owner of the property.
Benefits Over a Will
So, creating a life tenant is kind of like just saying in a will, that you are leaving property to someone else. So why do this as a life estate, as opposed to just doing it in a will? One big reason is that you avoid the probate process, at least when it comes to real estate.
The new owners don’t have to go to court for probate, the court doesn’t have to inventory property, and the property doesn’t count towards the value of your probate estate, among other big benefits to avoiding the probate process.
There is also a tax benefit to the remainderman because when a life estate is created, when the person who created the life estate passes away, the remainderman will only be taxed on the last purchase price of the house—not on its current price. This can represent a capital gains and transfer tax savings.
Additionally, there are some benefits to those who receive Medicaid, as being a remainderman and inheriting property as one, can be a big benefit to Medicaid planning and ensuring that you retain your benefits.
How to Create the Life Estate
You can create a life estate simply by creating and recording a deed during your lifetime, transferring property from you (as the current legal owner of the property) to you and whoever you name, as remaindermen.
Do you have a probate or real estate question? We can help. Call a West Palm Beach real estate lawyer at the Law Offices of Larry E. Bray today.