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How do life estate deeds work?

Protect your home from probate delays by sharing interest in your property with a beneficiary.

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As one of your largest assets, your home is a central part of your estate planning. Life estate deeds keep your property from being subject to probate and Medicaid liens, while allowing you to live in your home until you die. But you’ll need to decide if those protections are worth what you give up.

What is a life estate deed?

A life estate deed is a way to gift your property to your beneficiaries while you’re still alive and keep real estate from having to go through probate.

Since the ownership of your home reverts to your beneficiaries once you die, the property is no longer part of the original owner’s estate, so the property transfer can happen immediately. Your heirs won’t have to wait to take possession of your property.

What are the different types of life estate deeds?

There are three types of life estate deeds with different benefits and drawbacks, but not all are available in every state.

Regular life estate deed

In this life estate deed, the owner has life estate rights to continue living on the property until death. The beneficiaries, called remaindermen in the legal document, own the property once the deed is in place. That means the owner can’t sell or mortgage the property without permission from the beneficiaries. And if they do sell, the beneficiaries become parties in the sale.

Enhanced life estate deeds

In this deed, sometimes called a lady bird deed, the owner becomes a life tenant, meaning they keep all rights over the property — even the right to sell or mortgage the property without the permission of the remaindermen. Ownership of the property isn’t transferred until the day the owner dies. This agreement avoids probate because the gift is a direct transfer of property to beneficiaries.

And even though you are still the owner of the property, the enhanced life estate deed removes your property as an asset attached to your estate, which can help you qualify for Medicaid more easily. Medicaid requires that you use your own assets to pay for your long-term care before you can qualify for benefits, and looks back five years to determine your assets. As long as you make the enhanced life estate agreement five years before you apply for Medicaid, your home equity won’t be considered during the medicaid qualification process.

Enhanced life estate deeds are only available in five states: Florida, Michigan, Texas, Vermont and West Virginia.

Transfer on death deeds

If you don’t live in one of the five states where enhanced life estate deeds are recognized, but you need the protection it provides, consider a beneficiary deed — also called a transfer on death deed.

It functions the same as an enhanced deed, except the beneficiary deed can be revoked. Consult a lawyer to help craft this agreement since the language must be specific for your property to avoid probate.

Beneficiary life estate deeds are legally recognized in these states:

  • Alaska
  • Arizona
  • Arkansas
  • California
  • Colorado
  • District of Columbia
  • Hawaii
  • Illinois
  • Indiana
  • Kansas
  • Minnesota
  • Missouri
  • Montana
  • Nebraska
  • Nevada
  • New Mexico
  • North Dakota
  • Ohio
  • Oklahoma
  • Oregon
  • South Dakota
  • Texas
  • Virginia
  • Washington
  • West Virginia
  • Wisconsin
  • Wyoming

Enhanced life estate deed watch-outs

While an enhanced life estate deed won’t come with a gift tax, there are other tax implications to keep in mind. The property is still seen as an inheritance, which makes it subject to estate taxes. But that only applies if your full estate is worth more than $11.58 million, the 2020 estate tax threshold.

Capital gains taxes may also come into play if a beneficiary waits too long to sell the property. Capital gains can be avoided if the house is sold right away, since the home is valued at the time of the owner’s death, not at the time the deed is signed, which means little to no added value between the deed transfer and the sale of the home. But the longer you hold onto the property, the more value is added and the more tax you’ll have to pay.

Are life estate deeds worth it?

Filing a deed frees your beneficiaries from having to wade through probate and ensures your home isn’t subject to Medicaid liens if you need long-term care in the future. But you’re basically bringing a third party into all of the decisions regarding your home from the day the deed is filed until you die.

Depending on which deed you choose, that means you can’t sell or mortgage your house without their permission. Also, if the beneficiary’s finances turn bad or they get a divorce, your house is considered an asset in those settlements, even while you’re still alive. Whether a life estate deed is right for you and who you want to transfer your property to are two decisions to make carefully, possibly with the help of an estate planning attorney.

How to draft a life estate deed

While there are a few free life estate deed forms floating around online, the best way to make sure you’re fully protected is to hire an estate planning attorney to draft your deed. This is especially advised if you’re planning to draft an enhanced life estate deed or beneficiary deed, where the state might dictate the language required to qualify.

You’ll also want to make sure that filing a life estate deed doesn’t conflict with the rest of your estate planning by tying up that asset in an irrevocable agreement with a third party.

How does life insurance affect a life estate deed?

While both life insurance and a life estate deed may be part of your estate planning, they are mostly unrelated. You can have both in place with differing beneficiaries. But if you intend a portion of your life insurance benefit to pay off your mortgage, your remainder beneficiary must also be a beneficiary to your life insurance.

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Alternatives to a life estate deed.

Before you file your life estate deed, consider other options that offer similar benefits without some of the drawbacks:

  • Revocable living trust. A living trust can provide all of the protections as a life estate, but with the ability to make changes as you age and your life situation changes.
  • Stipulations in your will. While a will can’t protect your home from probate, with a few simple stipulations in your last will and testament, it can ensure that your property is protected and transferred to the right people after you die. For example, if you’d like your home to stay in the family, you can stipulate that the home cannot be sold as long as one of your heirs wants to live in it.
  • Life estate in your will. You can make sure your home goes to your spouse and then transfers to your beneficiaries when your spouse dies, but without giving financial interest in the property to one of your children before you die. Some owners choose this option when their spouse is a step parent, but the owner wants to ensure the home isn’t sold without permission of the children.
  • Life insurance. If your concern is making sure your beneficiaries don’t have to pay probate costs or estate taxes, consider taking out a life insurance policy to help cover those costs and other end-of-life expenses.

Bottom line

Creating a life estate deed can help your beneficiaries avoid probate on your home while also protecting your property assets if you need long-term care. But a life estate deed is irrevocable without the consent of the beneficiary. And if that lack of flexibility isn’t right for you, compare other options to see if there’s a better way to protect your assets, such as investing in a life insurance policy.

Frequently asked questions about life estate deeds

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