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SMART INSIGHTS FROM PROFESSIONAL ADVISERS

An Overlooked Way to Pass Down Your Home Without Probate: The Life Estate

If you don't want to set up a trust, a life estate can solve some possibly lengthy and costly problems for your heirs.

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In my experience, most people remember to do basic estate-planning tasks like adding beneficiaries or a Transfer on Death designation to important financial assets. But what about your home?

SEE ALSO: 5 Types of People You Should Gift to Using Your Will

Just designating a beneficiary in your will or assuming the home will pass to your children could create problems for your heirs. After all, probate can be lengthy and costly, and in the meantime your kids might have to deal with keeping up your property or making mortgage payments until they’re able to sell.

But there is another way.

The Life Estate

If you decide not to set up a trust, you still have options for your home. One option might be a life estate.

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In this setup, you (as the “life tenant”) retain the right to live in your home until your death, at which time the property is automatically transferred to the “remaindermen,” or your stated heirs. This setup can work for individuals or for couples who want to ensure that both parties can remain in the home for their lifetimes.

State laws govern property ownership, so it’s important to find out what processes you’ll need to go through to set up the life estate where you live. Please visit your county government’s website to learn the specifics of what you need to do.

Generally speaking, you’ll need to fill out and execute a deed to the property (typically in the presence of a notary) that records your status as the “grantor,” your remaindermen’s status as “grantees” and a notation on the deed that you will retain a life estate in the home. It will also cover basic information about your property.

From there, you’ll file the deed with your county’s Registry of Deeds so that it becomes binding. Also, be sure to update your property insurance policy to reflect the addition of new owners.

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Control and responsibility

As the life tenant, you will still legally be responsible for your mortgage, taxes and insurance costs, and property maintenance. Of course, your children (or other remaindermen) can agree to cover some of these costs if you choose.

However, even though you’ll have all the responsibilities of a full owner, your control over your home is not limitless. Once you add remaindermen to your property’s deed, you cannot unilaterally remove them without their consent. Similarly, you will not be able to sell or mortgage your home without the agreement of the remaindermen. If you do decide to sell while you’re still alive, keep in mind that the sale’s proceeds will be divided across all parties.

Of course, if everyone agrees to reverse the life estate, you’ll be able to do so — as long as you file the updated deed correctly for your locality.

Common pitfalls

There are other potential drawbacks to a life estate that you should consider.

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Most important, a life estate ties up your financial interests with that of your heirs. For example, if one of your remaindermen goes through a divorce or bankruptcy or has trouble paying their taxes, it’s possible that a lien could be filed against their interest in your property.

Similarly, the way the deed is titled will have important repercussions over time. For example, if your heirs are listed as “joint tenants,” you’ll be guaranteed that if one of your heirs should die, the ownership stake will revert to the other remaindermen. On the other hand, if you go with the default “tenants in common” designation, upon each heir’s death the ownership stake would become part of their estate and go to their heirs in turn.

As you can see, this can get complicated very quickly — not only practically, but emotionally. If you want to control the eventual distribution of the property, the way you title the deed is key to enforcing your wishes.

Finally, keep in mind that giving away assets through a life estate can affect the timing of Medicaid eligibility and trigger gift taxes for your heirs. The specifics will depend on your local laws and on the value of your property and the way you transfer ownership — for example, buying a new property with your heirs as remaindermen could have different implications than giving title to your existing home.

Again, it is very important to be familiar with your local regulations with respect to setting up the life estate appropriately and managing any potential tax consequences.

Important benefits

That said, there are benefits to a life estate.

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Not only can a life estate ensure that you’ll remain in your home, it can make it easier for your heirs to manage the logistics of your property after your death. I’ve seen situations where children have had to invest heavily in managing a deceased parent’s property until probate is completed, which can be costly and stressful for bereaved families.

A life estate can also help you meet the needs of various parties. For example, you can use a life estate to ensure that your home goes to your children from a previous marriage, while also guaranteeing that your spouse is able to stay for his or her lifetime should you die first.

Managing the risks – or finding an alternative

However, it’s important to remember the risks and find ways to manage the drawbacks. Generally, you’re more likely to have a successful experience with the life estate if you are:

  • On good terms with your heirs and their families
  • Confident and in agreement about your plans and preferences for titling the property
  • Able to communicate effectively about your respective financial positions and needs
  • Willing to work together to find solutions if your situations change
  • If you’re not sure about these factors and you want to be certain that your property avoids probate, it could make more sense to set up a trust instead. While they’re a little more costly at the outset, trusts generally avoid the risks of both probate and the life estate, and they can also incorporate your financial assets and other properties.

    Of course, as with everything in personal finance, the right decision is highly dependent on your specific situation. When making these types of plans, it’s usually very helpful to speak to an estate-planning attorney, who can help you navigate the options and find the course that’s most suitable for your family.

    See Also: Death of a Spouse: The Under-Discussed Risk in Retirement

    Written by Bradford Pine with Anna B. Wroblewska.

    Brad Pineis a wealth adviser and president of Bradford Pine Wealth Group, based in Garden City, N.Y. BP Wealth Group assists individuals and entrepreneurs to create wealth, simplify their lives and plan for retirement. Honesty, integrity and reliability are the foundations of Pine's investment philosophy.

    Comments are suppressed in compliance with industry guidelines. Click here to learn more and read more articles from the author.

    This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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