Wills and trusts aren’t the only way to pass property onto a loved one when you pass away, you can also use a life estate. A life estate differs significantly from a will, so most people are unfamiliar with the way it works, especially in regard to selling a property. Today, we’ll guide you through exactly what a life estate is, what that means for any property included in a life estate, and how to sell a property included in a life estate.
What is a life estate?
A life estate is a little like a will or a trust, but with a few key differences. When the person creating the life estate signs, a part of the ownership of the property goes to the person they want to inherit the property. This is most common when the owner of the property wants to pre-gift it to their heir(s), without losing ownership.
What are the benefits of a life estate?
Life estates make passing property onto a loved one easier because they already have part-ownership of the property, meaning they need only file the death certificate and create a new deed to take full ownership of the property.
This means the home is not tied up in the stressful probate process, and if the person passing on the property had concerns that someone would try and legally take it away from their loved one, they can be sure they cannot.
Life estates can also be a way for a loved one to help a parent or parental figure keep their home. For example, if they can pay their mortgage payments but aren’t likely to be accepted due to retirement, a life estate can make their loved one part-owner and so they can apply for a mortgage together, making it more likely that they can keep the house.
What are the disadvantages of a life estate?
You need to trust the person you’re planning to give your home to implicitly because they will have 50% control and ownership of the home from the time of the life estate’s creation. This means the original owner of the home will need to seek approval from the co-owner (called the “remainderman” in these circumstances) to sell the property, lease it, or refinance it.
Another disadvantage is if you decide to sell the home before your loved one inherits it, the proceeds must be split between you (based on these IRS actuarial tables). If you need that money to buy another appropriate property, you’ll need to trust that your beneficiary will allow you to have the money now.
Another disadvantage is that the home is considered an asset for the remainderman, and so if they get into financial trouble their creditors may be able to put a lien on the property.
Can you sell a home in a life estate?
Yes, and this can be straightforward, or it can get complicated. Here are the two ways this can work:
1. You both agree to sell
Provided you both (the creator and the remainderman) agree to sell, you can sell the property without too many complications. For example, if a mom decides she wants her daughter to inherit the property immediately when she passes away after her husband dies, she may create a life estate. However, fifteen years on, and she’s finding living in the family home difficult as it’s far from town and she’s not as mobile as she once was.
Both parties may then decide to sell the property so the mom can buy a more suitable home, either “gifting” her daughter 50% of the proceeds then (though the daughter has total legal right to the money and will be given it in the sale), or the daughter may decide to gift the money back to her mom for the purchase of the new home, knowing she’ll inherit the new home eventually.
2. The remainderman sells their share
This is where things can get complicated. It is possible for the remainderman to decide to sell their share of the property, but the terms of this would mean that the new buyer would only get full possession of the home after the life tenant’s death, and instead gets to be the new remainderman.
In most cases, this really only works if there are multiple siblings and the original remainderman decides to sell to another sibling (or another family member) since few people are going to be willing to buy a property with no knowledge of when they’ll get full ownership of the property.
Is anything different when you sell a property in a life estate?
Again, provided both the creator of the life estate and the remainderman agree to sell, the house sale can move forward as normal. Any potential buyers won’t know there’s a life estate in place, and it won’t affect how much they are willing to pay for the property.
The biggest difference here is in how the funds are divided. Remember, the remainderman has a right to 50% of the property, and thus usually gets 50% of the funds. (Check the IRS actuarial tables for exact figures.)
How do I sell a property in a life estate after the creator passes away?
Once the creator of the life estate passes away, provided you are the remainderman, you simply need to have a real estate lawyer create a deed in your name only. Once the house is 100% in your ownership, you can move forward with the house sale as you would any other sale.
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