Life Estate Deeds — Pros & Cons

A parent routinely comes in and will say: “I want to put my house into my kids’ names while I’m alive to protect it and avoid probate, but I do not want them to be able to kick me out!”  There are several options in Indiana, but a Life Estate Deed is one. A Life Estate Deed is a Quitclaim (or Warranty Deed) that the parent, in this example, executes and that is recorded in the County where the real property is located as the sole owner (also known as Grantor), to his kids who are called the “Remaindermen” or “Grantees.” The parent/Grantor retains a “life estate” with the proper wording in the deed.  The parent has the exclusive right to live, rent, possess the real property during his life, which expires immediately upon the parent’s passing.  The parent/life estate holder is responsible for paying taxes, insurance, and still receives the homestead deduction and other deductions/exemptions for property taxes.  The Remaindermen do not have the right to possession/use/rents/income until the passing of the Life Estate Holder.

Pros of a Life Estate Deed.  It avoids probate upon passing of the Life Estate Holder.  The Life Estate Holder also retains the stepped-up basis for income tax purposes upon their passing and the deductions and exemptions for lowering real property taxes. Also, the use and possession of the real property are retained during the Life Estate Holder’s life.  As for Medicaid planning and other benefits, the execution of the Life Estate Deed starts the five-year clock upon the “transfer/gift” of the real property.

Cons of a Life Estate Deed.  As just mentioned, if Medicaid and some other benefits are needed within five years, the value of this transfer could impact the ability to receive benefits.  The children/Remaindermen could have current or future issues such as bankruptcy, divorce, tax liens, and judgments attached to their remainder or future interest in the real property.   Another con is that the Life Estate Deed is irrevocable and cannot be undone or sold or refinanced unless all the owners sign off and have the legal capacity to do so.  If sold during the life of the Life Estate Holder, the proceeds at closing will need to be split according to tax tables. If any Remaindermen pass away or are incapacitated, they must deal with others who have ownership or legal authority.

Since this is an irrevocable transfer, it is important to consult with your legal, financial, and accounting experts for the issues applicable to your specific situation.