Is a Life Estate the Way to Live your Later Years?

 
 
 

THE RISK OF TURNING OVER YOUR HOME TO YOUR KIDS

 Linda Toga

THINKING ABOUT PUTTING YOUR CHILDREN’S NAME on the deed to your house?  Think again.

Although giving your children your house and reserving for yourself a life estate may seem like a smart strategy to avoid probate, there are potential downsides, which may be significant.

First, a little about life estates: There are different types of interests you can hold in real property. Fee interest (you own the property outright) or leasehold interest (you’re a tenant).  A life estate is when your interest in the property is not an ownership interest, but simply the right to use the property  for your lifetime. A person with a life estate is sometimes called a life tenant. The property cannot be sold without your consent during your life but, upon death, your interest in the property dies along with you.

The most obvious downside is loss of control. Once you put your children’s names on the deed, you no longer own the house and can no longer sell, lease or encumber the property with a mortgage without the written consent of your children. Nice, huh?

Your sole right in the house is limited to the right to live in the house until you die. If you decide you want to move into a smaller place, you can certainly move out. However, you cannot insist that the house be sold so that you have the funds to buy a new home. If your children do not consent to sell the house, you may be out of luck. And even if they consent, you will only be entitled to the proceeds attributable to the value of your life estate (based on actuarial tables). So the older you are, the less your life estate will be worth and the less you will have to put into a new home.

In addition to the losing control you enjoy as an owner, putting your children’s names on the deed puts your home at risk since it will be fair game for your children’s creditors. If your children are unlucky enough to have judgments filed against them, their creditors can place liens on the house to insure that your children pay their debts. These liens generally must be paid off, with interest, when the house is sold, if not sooner. As a result, even if your children consent to the sale of the house so you can move into a smaller place, once the creditors are satisfied it’s possible there may not be enough money left for you to buy the smaller place.

In light of the significant risks associated with life estates, using a life estate just to avoid probate is clearly not the best strategy. Be sure to check with your lawyer to see if a life estate should be part of your comprehensive estate plan, and what your other options are.

Linda M. Toga, is the owner of the East Setauket, NY-based Law Offices of Linda M. Toga, P.C. where she focuses on estate planning and administration, as well as litigation and issues involving real estate and small businesses. Ms. Toga is a frequent lecturer and the author of Legally Speaking which appears monthly in the Times Beacon Record Newspapers. Contact: Linda@LMTogalaw.com

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