In contemplating your estate plan and envisioning how assets would be divided in the event of your death, you may want a loved one to continue to live in your home. One way to achieve this is to create something called a “life estate”.
What is a Life Estate?
When you create a life estate in your estate plan, you allow a specific individual to remain living in your home during their lifetime. However, that individual is not the person who will eventually inherit the house. This mechanism separates the ownership of the property from the control of the property. The individual who receives the life estate is known as the “life tenant” and the individual who will assume ownership at the life tenant’s death is called the “remainderman”.
During their lifetime, the life tenant maintains control of the property but cannot sell or borrow against it without the remainderman’s cooperation. When the life tenant passes away, the remainderman becomes the legal owner of the property and bypasses the probate process.
What is the purpose of a life estate?
- To avoid a costly, time-consuming, and difficult probate process
- To allow a beneficiary to reside in a home during their lifetime without leaving that beneficiary the home as an inheritance
How does it work?
If you have a child, family member, or friend who lives with you, you may want to ensure that they can remain in your house even if you were to die. However, you may not want to actually bequeath them the house as an asset at your death.
A common example is when one child is living in the home with the parents, but the other children are not. The parents may want to ensure that the child living at home can remain in the home during that child’s lifetime. Payments towards house expenses (utilities, property taxes, repairs, and perhaps mortgage payments) may be required of the child living in the home. This child is referred to as the life-tenant. If the life-tenant child does not make the necessary payments to maintain the house as required in your estate plan, the other beneficiaries (the remaindermen beneficiaries) can sell the home. After the death of the life-tenant, the remaindermen beneficiaries will inherit the home without having to go through the probate process.
What are the benefits?
- Avoid probate: The terms of the life estate allow your home to be transferred to the remainderman directly, without obtaining approval from the probate court.
- Beneficiary can remain in your home: As the life tenant, your child or other beneficiary can remain in the home for the rest of their life.
This is a bird’s eye view of the life estate strategy. As always, the advice of a competent estate planning attorney is necessary to understand the ramifications of this, or any, estate planning decision as it relates to your specific financial picture.