With a rise in the value of land over the past decade, one’s largest asset oftentimes ends up being their home. While a last will and testament usually cover the transfer of title of real estate upon death, life estate deeds also fulfill this purpose while also providing many more benefits that property owners might not be aware of.

What is a Life Estate Deed?

Deeds effectively transfer real estate from one party to another. The parties to a life estate deed are referred to as the “life tenant” and the “remainderman.” The life tenant (the current owner) transfers the property to the remainderman (the beneficiary). While the deed is signed and recorded now, the full transfer of title does not happen until the death of the life tenant. The life tenant can use the property during his or her natural life and has rights to any rents or profits arising from its use. Upon the death of the life tenant, the remainderman receives the full title and all the rights and benefits of owning the property.

Benefits of Establishing a Life Estate Deed

• Probate Avoidance: One of the biggest reasons many clients choose life estate deeds is probate avoidance. Because the home transfers to the remainderman automatically upon the owner’s death, it does not go through probate. If the home is administered through the will, it can take several months or years before the beneficiaries can take possession. This could also save the estate thousands of dollars in probate fees.
• Medicaid Liens: Another reason many clients do life estate deeds is to avoid Medicaid liens on the home. If the owner goes into a nursing home and passes away, Medicaid typically will try to recoup the owner’s care costs by placing a lien on any real estate owned by the estate. With a life estate deed, this is avoided because the home is owned by the remainderman. To avoid these liens, the life estate deed must be executed at least five (5) years prior to the application for Medicaid.
• Taxes: There are also some tax benefits. When the life tenant dies, the remainderman typically receives a step-up tax basis in the property. This means the remainderman takes ownership of the home at its fair market value at the time of the life tenant’s death. This can save the remainderman capital gains tax when the property is sold. It is also important to mention that the life tenant continues to receive many property tax exemptions they had prior to the deed (STAR, Senior Citizens, Veterans, etc.).
• Lower Cost Compared to Trusts: There are several types of trusts that also achieve many of the same benefits. While setting up a trust is generally advisable, the up-front cost of setting one up can be daunting. The life estate deed provides an inexpensive alternative to clients owning primarily one home.

Potential Issues That Could Arise from a Life Estate Deed

• Selling the Home: Life estate deeds can create some mechanical issues if the life tenant wants to sell the home. Purchase agreements and closing documents must be executed by all parties on the deed, including the remainderman. This can be problematic if the remainderman is unavailable or does not want the home sold.
• Mortgages: If the owner has a mortgage on the home or wants to get one, banks and lenders may have an issue with a remainderman on the deed. It is highly recommended that the client gets written permission from the lender to consent to the deed prior to signing.
• Title Defects: Because the transfer is typically between family members, life estate deeds typically do not include a full examination of the home’s title. There may be defects in the title or judgments against the life tenant or the remainderman, which will affect everyone’s interest.

Life estate deeds have many benefits for clients whose primary asset is their home. They can be an effective, low-cost tool to avoid probate and Medicaid liens from affecting the home. If you would like to learn more about life estate deeds, please contact us for a consultation.

Jason Snyder is a Senior Associate in Tully Rinckey PLLC’s Rochester office, where he focuses his practice on wills, trusts, estate administration, and real estate law. He has particular experience in drafting wills, estate planning, estate administration, and all facets of real estate transactions. He can be reached at info@tullylegal.com or at (888)-529-4543.