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What is a Deed with Life Estate?

If you’re an elderly homeowner a deed with life estate is a tool worth considering. This real estate planning tool achieves several key aims.

First, it keeps your home out of probate when you die. While the probate process might pass the home to your heirs anyway it is a long, drawn out process. Like any court process, it is also unpredictable. It can also be costly.

Instead, it transfers the deed to your home straight to the beneficiaries. 

Meanwhile, while you are alive, you remain able to use the property and you will not be required to pay rent in order to do it. The beneficiaries of the deed with life estate will not be able to evict you as long as you are alive.

You also protect it from certain debtors. In our current market the people who use this tool are most often trying to protect their property from healthcare debt. 

Second, it offers certain tax advantages if your property has gone up in value over time. Your children or grandchildren would receive the property on a “market value basis.” This means it would be as if the house had been sold within six days of the date of death, freeing them from having to pay capital gains taxes.

Of course, like any legal move you might make with your property, much depends on your ability to execute the process correctly. You will need a real estate attorney’s help to ensure everything is set up appropriately. You will also need an accountant’s help to make sure you are maximizing the tax benefits in your specific case.

You’ll also want to ask your attorney if this is the right tool for you. If there is ever a chance you will want to sell the home before you die then using a deed with life estate can vastly complicate the process. This can also be a harder tool to use if you’re not going to reside in the home: if, for example, you’re moving into an assisted living facility but are trying to hold on to the property for their sake. 

You do not have to be rich to use this tool. Many people use it because they are on Medicaid. Their house is one of the few assets they own and one of the only things of value they know they can pass to their children. They don’t want to see it taken to reimburse Medicaid for medical debt

Of course, if your children are also government benefit beneficiaries this can be counterproductive since Medicaid or other organizations might well come after the home to cover your children’s debts instead.

There are disadvantages. For example, the beneficiaries do own the home, so they could take out a HELOC on it, or transfer the deed to someone else without your permission. You’d still be able to live in the home until you were done with it, but it still removes a measure of control.

You also won’t be able to change the beneficiary once the decision is made, unless the current beneficiary consents. 

With luck, of course, you’d be able to trust that your beneficiaries are going to be kind enough to acknowledge and follow your wishes. 

See also:

Tips for Long Island Co-Owners

Why is a Long Island Property Deed So Important?

What is Title Insurance and Do You Need It?