What Happens to My Home When I Die?

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Estate planning raises complex questions like what happens to my car when I die; what happens to my money; what do I do to ensure my remains are taken care of according to my wishes?  All of these are excellent questions; however, one of the most notable is what happens to my home?  A potential solution to this question is putting your home in a life estate.

A life estate is when you own your home jointly with whomever you want your home to transfer upon your death.  A life estate allows for you to reside in your home as a life tenant until you pass, after which title transfers to the other owner (the remainderman).  

One of the remarkable things about a life estate is that you maintain complete control of your property until you die.  This means that as long as you live, the remainderman cannot force you out of your home via sale, ejectment, etc.  Basically, until you die, you maintain all ownership rights (i.e. property tax obligations, maintenance obligations, etc.).

In addition to preserving control of your property, a life estate allows you to choose to whom your property transfers.  Oftentimes, real property goes through probate, eventually resulting in being sold off.  Maybe your home has sentimental value for your family.  Maybe your home holds special memories for friends.  A life estate is a great way of preserving those memories and transferring the property to those who will keep those memories alive.

A life estate also offers potential tax breaks.  Upon your death, taxes for the reaminderman will be on a stepped up basis, meaning taxes are based on the value of the home at the time of your death, not the current property value.  If you know anything about the Baldwin and Mobile County housing market, this is a major bonus!

Although a life estate serves as a way to avoid probate and control to whom your property transfers, there are some points to consider.  A potential drawback is if prior to your death, you decide to sell your property, you must obtain the consent from the remainderman (because you jointly own the property). Among other things, this can cause controversy if the remainderman pre-deceases you, resulting in their interest transferring to their estate; you have a falling out with the remainderman; or the remainderman is part of a contentious divorce.

Despite the drawbacks, a life estate is a fantastic option for your end of life plans.  For more information or guidance on your estate planning needs, give us a call at 251-621-1555 to schedule a consultation.

Life Estates: What You Need to Know

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The term “life estate” often comes up in discussions of estate planning and Medicaid planning,
but what exactly does it mean? A life estate is a form of joint ownership that allows one
person (or a couple) to remain in a house until his/her/their death, at which time it passes to the
successor (often a child), referred to as the “remainderman”. Life estates can be used to
avoid probate while simultaneously giving a house to children without losing the ability to live in
the home during the owner’s lifetime. The person(s) holding the life estate remains responsible
for property tax (with the benefit of homestead and age related tax exemptions) and
homeowner’s insurance. The other owner — the remainderman — has a current ownership
interest but cannot take possession until the death of the life estate holder.

The life tenant has full control of the property during his or her lifetime and has the legal
responsibility to maintain the property as well as the right to use it, rent it out, and make
improvements to it. This type of deed can play an important role in Medicaid planning since
Medicaid does not assign any value to a life estate when the parent applies for Medicaid to pay
for nursing home care.

A life estate deed can be a great tool for passing property after death.  The remainderman will
have a stepped up tax basis in the property which is the fair market value on the date of death of
the last life tenant.  An additional benefit is the fact that Medicaid will not count the life estate as
a resource if the life estate deed was executed five years prior to Medicaid application, and the
property would not be subject to Medicaid Estate Recovery since it will never be probate
property.

All of these are huge benefits to executing a life estate deed, however, there are some setbacks
that you should be aware of. If the person or couple holding the life estate decides to sell the
property they will need the children to agree on the sale because the children are now joint
owners with the parents.  The parents own use of the property NOW, and the children, as
remaindermen, own the FUTURE use of the property. With this in mind, before signing a life
estate deed it is important to make sure the remaindermen would be willing to relinquish their
interest and sign off on any sale of the property.