The Life Estate Deed: Is It for You?

You may not know exactly what probate is, but chances are you’re aware it’s something to avoid if possible. If you’re researching ways to spare your family the probate process, you may come across the life estate deed as a potential option. You may be asking yourself:

What is probate and why would I want to avoid it?

In short, probate is complex, time-consuming, and costly. It’s the process to pass along a deceased person’s assets that are not subject to a trust or owned with survivorship provisions. The executor named in the will—or the court-appointed administrator if there is no will—manages the probate process. The court must authenticate the will and determine that it is valid. All the deceased person’s assets, liabilities, and beneficiaries must be identified. Collecting estate assets, paying estate liabilities (including taxes), and then distributing the remaining assets to the beneficiaries can take well over a year.

How does a life estate deed work?

Many different estate-planning strategies have been devised to avoid probate. The life estate deed is an example. A life estate deed basically divides the subject property into two consecutive interests: a current life estate interest and a future remainder interest. A life estate deed is often used to allow a homeowner to remain in the home for life, with the home passing to the designated remainder beneficiary at death.

Sometimes, a simple life estate deed—which tends to be relatively inexpensive to prepare—can be an ideal way to transfer property at death while avoiding probate. But it’s not always the best strategy and definitely warrants a close look at the risks.

What are the potential risks of a life estate deed?

Here are some of the potential downsides to think about when considering a life estate deed.

    • Taxes
      The life estate deed avoids probate, but estate taxes will still come into play. In addition, income tax issues may arise if the home is sold during the life tenancy as the principal residence exclusion on capital gains tax may be reduced or lost entirely.
    • Medicaid Penalty
      Medicaid’s lookback period (five years in most states) must be considered if the life tenant intends to apply for Medicaid benefits. To Medicaid, a life estate deed will look like a gift and trigger the penalty period.
    • Control
      Circumstances often change. If they do, the lifetime beneficiary has given up the ability to sell or mortgage the home and will only be able to do so if the remainder beneficiary agrees to transfer the property back.
    • Creditor Reach: The lifetime beneficiary’s right to enjoy the property will be subject to the remainder beneficiary’s creditors, which may include the remainder beneficiary’s bankruptcy trustee, divorcing spouse, or a personal injury plaintiff.

     
    Conclusion

    For some circumstances, a life estate deed may be a great solution for a family that wants to avoid probate. But a lot of moving pieces must come together properly for effective estate planning, and the life estate deed imposes some restrictions that may be undesirable. To avoid probate, a more flexible trust-based estate plan may a better option.

    Work with a Knowledgeable and Experienced Florida Attorney

    If you’d like to discuss probate and how to avoid it, let’s talk. Call us today to schedule an initial meeting at (321) 804-2915.