Using a Life Estate to Protect Your Home
Written by Kerry S. Doolittle   
Monday, 03 October 2011

You heard about creating a “Living Trust” to protect your assets.  Sounds like a good idea, but what does that mean?  Unfortunately, that phrase “Living Trust” is a marketing gimmick, not a legal term.  I discourage most clients from this course when asked about creating a living trust.  A trust should not be created without a specific purpose in mind, such as providing for a disable child, or minimizing estate taxes, or protecting a spendthrift heir.  The specific purpose will greatly effect the type of trust chosen.

Trusts come in many forms which are first broken down into two main categories: “Intervivos Trusts” and “Testamentary Trusts”.  The second category refers to trusts which are created by your last will and testament after your death.  The first category means “in life” and refers to any trust you create during your lifetime, sometimes referred to as a Living Trusts.  Thus the term "Living Trust" does not refer to any specific type of trust. 

 A life estate in real property is a different animal altogether. Strictly speaking, a life estate arrangement is not a trust.


To understand the concept of a life estate in real property, first think of title to land as being a bundle of sticks, instead of one large log.  The entire bundle of title sticks is called fee simple title.  To say someone owns title in fee simple is to say they own all of the sticks in the bundle, the entire title with no exceptions.

Title can be split up into different interests.  One common example is a deed to secure debt.  You give a portion of the sticks to the bank (their ownership to secure the debt) and you retain a portion of the sticks (your right of redemption once the debt has been paid).  When someone euphemistically says “the bank owns my house” they are actually being technically accurate. 

A life estate is another example.  Lets say that you are a husband who wants to create a life estate for the benefit of your wife, with the property going to your children at her death.  You are dividing the bundle of sticks between your wife (life tenant) and your children (remaindermen), with of course the bank still holding its portion as security.

The life tenant (your wife) during her lifetime basically owns the property subject to the bank's security interest and subject the remaindermen's interest.  It is easy to slip here and say the remaindermen’s inheritance, but the remaindermen's interest is not derived through inheritance.  In fact, the remaindermen can be complete strangers to the family with no inheritance rights.  Their right is created solely through the deed of conveyance.

Be warned, this situation can create a bit of inconvenience if you need to refinance the property, for example, because you will need the remaindermen's cooperation.  The solution in such a situation is to ask the remaindermen to quitclaim their interest back to the life tenant, the life tenant then obtains the refinancing, and once that is complete, the life tenant reconveys the remainder interest back to the remaindermen.  This assumes that the remaindermen are willing to cooperate.  That need for cooperation can work both ways.  A non-cooperative remaindermen could hold up a loan to replace a leaky roof, but could also hold up a loan where the life tenant wants to give away all of her money to a cult group or blow it on a trip to Las Vegas.  It creates a built in check and balance between the remainderman’s interest in the preserving the equity and the life tenant’s interest in consuming the equity.  We assume the children will consider the best interest of their mother, but that is not always the case.  You need to understand your own family dynamics beforehand.

The life tenant has the right to live in the home, as well as the responsibility to maintain and preserve the property for the remaindermen.  The life tenant generally pays the taxes and insurance as well, but the remaindermen may step in if the life tenant is unable to do so in order to protect their own interest.

Upon the death of the life tenant (or such earlier condition specified as terminating the life estate), the remaindermen automatically become the fee simple owners (subject to the bank's interest of course) of the property.  However, good practice dictates filing an affidavit regarding title to disclose the death of the wife (or other triggering event) on the deed records so that third parties are put on notice that the remaindermen's interest has become fee simple (subject to the bank's interest)..

Now a moment about creditors.  To make this easier, consider the property in question a rental house instead of a primary residence.  A creditor of a remainderman can only "attach" the remainderman's interest, which is basically a future expectation, nothing presently tangible.  Therefore, they cannot attach the property directly until the life estate ends and the remainderman's interest becomes complete.  A creditor of the life tenant, can only attach the life tenant's interest, which is limited to the life tenant's life time.  Essentially, a creditor could collect the net rent generated by the property after paying all expenses as long as the life tenant survived.  Also, the bank's security interest is generally higher priority than any other creditor (except taxes notably), which means the bank has first dibs on the net rental income.  In short, a property tied up in a life estate is not a very appealing target for creditors.

Finally, if the life estate is created and remains in existence for a minimum number of years, if the life tenant thereafter becomes incapacitated and needs to move to a nursing home, the property will be considered property of the life tenant in the determination of eligibility for state aid only to the extent of the net rental income value.  However, to address this possibility, I generally include other conditions which will trigger the termination of the life estate, such as being unable due to physical or mental limitations to continue residing in the home.  The justification is simple, the life estate is intended to assure that the wife has a home to dwell within, but if the wife is unable to continue living in the home, the purpose of the life estate has been fulfilled.  If the wife needs to move to a nursing home, where she may continue to live for a number of years, why leave the property tied up in a life estate?  If a sufficient number of years pass, when the life tenant goes into a nursing home, the life estate ends, and the life tenant has no further interest in the property, and nothing for the state to consider in making the eligibility determination.  Here is an example of the conditions I use:

By use of the term “life estate,” my intent is that the Life Tenant enjoy the right to reside therein for as long as Life Tenant lives, or until Life Tenant voluntarily chooses to vacate the home, or until Life Tenant is unable by reason of physical or mental health to continue to reside in the home; whichever event first occurs terminates the life estate herein created.  As a condition of this bequest, Life Tenant shall pay all city, county and state ad valorem taxes assessed against the property; pay all insurance premiums for fire and casualty protection of the property and all improvements thereon; maintain the house and property, keeping it in good condition for as long as Life Tenant lives there, normal wear and tear and damage by casualty excepted.  No money is to be borrowed against the property for any reason during the term of her life estate without the unanimous consent of all remaindermen.  Upon the death of the Life Tenant, or upon Life Tenant's voluntary relinquishment of the life estate herein created, or upon the earlier termination of the life estate, Grantor by these presents does  grant, bargain, sell, alien, convey and confirm the remainder interest in the above-described property to my children, [Remainderman Names], in equal shares, share and share alike, for their absolute use in fee simple.

Timing of when to create a life estate is the most difficult choice.  Wait too late, and the property is considered in determining eligibility for public assistance.  Create it too soon, and you are left with problems later should you decide to sell the home, or one of the remainderman dies, leaving a minor child inheriting their interest.  You never want a child owning any interest in real estate as it really complicates any financing or sale of the property. 

I hope this helps you to understand the advantages and limitations of using a life estate to protect your property. 

Last Updated ( Monday, 05 December 2011 )