In estate planning, utilizing the life estate agreement is rare, but can be effective in transferring property. Accordingly, the key reasons why people implement the life estate in their estate plans are as follows:   

• Avoid putting the property through probate.
• Impose controls such as passing property to your children.

In reality, the motivation to use the life estate is to impose controls on the property. As mentioned in the article The Life Estate and Personal Possessions, my Uncle lived in the home of his deceased spouse under a life estate agreement. In simple terms, the agreement allowed my Uncle to remain in the home until death. After the death of my Uncle, home ownership transferred to the children of his deceased spouse. Although the life estate worked well in my Uncle’s estate, this is not always the case. There are also disadvantages to the life estate agreement that could make using the agreement in any estate plan questionable.

Benefits of a Life Estate Agreement

Appropriately, there are a few benefits that a life estate agreement offers property owners. These benefits include the following:  

• Probate Avoidance – In the life estate, the final beneficiaries will receive the property after the life tenant dies. As a result, the property will avoid probate.

• Estate Tax Benefits – Since the property under the life estate remains an asset of the life tenant’s estate for estate tax purposes, the stepped-up basis remains for the final beneficiaries. Therefore, after the death of the life tenant, the final beneficiaries can use the value at the date of death as the basis.

• Long Term Care Protection – The transfer of the life estate deed triggers a five-year transfer period that protects the property from nursing home costs. After five years from the life estate transfer, the property remains protected and Medicaid benefits are obtainable for the life tenant, if needed. Unfortunately, if the life tenant needs nursing care within the five years of signing the life estate, private payment becomes necessary until the remaining penalty period ends. In this instance, the penalty period under the life estate is much less than if the property was transferred outright.

Although the life estate provides a few benefits, certain circumstances render the benefits less effective.

The Drawbacks of the Life Estate Agreement

Conversely, the life estate agreement also has some drawbacks. According to the Trust Lawyers Blog, some of the drawbacks include the following: 

• The life estate restricts the ability to finance the property;

• Each circumstance of the final beneficiary remains attached to the life estate which includes divorces, bankruptcies, or death;

• Final beneficiaries can never change;

• All parties must agree to sell the property;

• The entire value of the property will be included in the life tenant’s taxable estate for estate tax purposes.

Unfortunately, the drawbacks render the life estate restrictive in some circumstances. Therefore, these drawbacks need serious consideration before implementing the life estate in any estate plan.

Do You Need a Life Estate Agreement?

In any estate plan, the life estate agreement has restrictions that could render the agreement cumbersome. In my research on this subject, many professionals seem to avoid the life estate for that very reason. Actually, many of these professionals feel there are better estate planning tools that will accomplish what a life estate could accomplish without the restrictions. Therefore, unless your circumstances require a simple transfer of property, consider other methods of transferring property in your estate plan. 

Was this article helpful? Was the material enough, in your opinion, to explain why the life estate agreement is cumbersome? Share your thoughts in the comment box below. 

Reference

Plan Your Estate– Plan Your Estate by Nolo lends some hints as to when a Life Estate Agreement is acceptable.

Using a Life Estate Deed to Protect Your Home by Matthew Karr, Esq., The Heritage Law Center

Benefits and Drawbacks of Life Estates by Bridget T. Faldetta, Esq. The Trust Lawyers Blog