Life Estate Laws
A life estate is one way of avoiding probate of your property when you die, but it doesn't necessarily have to be used for that purpose. You can set up a life estate by creating a deed that automatically transfers your property to someone else at your death, allowing you to live in the home until that time. You can also leave a life estate to a beneficiary in your will instead. For example, you might leave your second wife a life estate in the home, which will then pass to your own children when she dies.
Ownership Interest Is Shared
A life estate legally establishes a shared interest in your property. If you transfer your property by deed to your children so they automatically have ownership when you die, you now share ownership with them. If you bequeath a life estate in your will, your selected beneficiary has an ownership interest in the property, as does whomever you've chosen to take ownership when she dies. In either case, the person who remains in the home is the "life tenant" and is entitled to live there until his death. Such an arrangement is irrevocable. You can't take away someone's interest in the property if you have a falling out and decide that you want to leave your home to someone else.
Your remainderman is the person to whom your property passes when your life tenant dies. For example, your children are your remaindermen if you reserve a life estate in your property for yourself, but arrange for them to receive the property when you die -- thus bypassing probate. Although a remainderman and a life tenant both have an ownership interest in a property, they don't have simultaneous possession of the property. One succeeds the other.
Similar to their possession of the property, a life tenant and remainderman's financial responsibilities are usually not simultaneous, either. A life tenant typically must pay the mortgage, if there is one, as well as property taxes and insurance. A life tenant must typically pay the costs of repairing and maintaining the property while he lives there. This might create a financial hardship for the tenant, if these costs are more than he can afford. You can create terms in your will, however, that ease these burdens. For example, you might bequeath the life tenant a sum of money that will pay off the mortgage. The remainderman's financial responsibilities do not typically begin until he receives possession of the home after the life tenant dies, at which point his responsibilities are those of any other homeowner.
When you create a life estate, you lock your remainderman and your life tenant into a permanent legal relationship that they can't easily get out of. Unlike with other types of property ownership, they can't file a lawsuit to terminate the life estate so each can walk away from the property with their rightful share. Although they can sell the property, they cannot do so without the agreement of everyone involved, and there may be complicated and unpleasant tax consequences.
Beverly Bird has been writing professionally for over 30 years. She specializes in personal finance and w, bankruptcy, and she writes as the tax expert for The Balance.