Title Tip – Life Estate – Some Areas To Watch For

A life estate is simple in concept – yet there are some areas where you can be “surprised”.  And most of the surprises we have seen are not particularly happy ones.

The common use of the life estate is as follows:  an aging person (such as the parents) will deed their property to another party(ies) (such as their children) but reserve for themselves a life estate.  This life estate gives the parent(s) the right to use the property as long as they are alive, but upon their passing the property will automatically transfer to the children.  Seems simple enough if everything goes according to plan.  However, there are some unexpected outcomes that you might be aware of.  Let me present a few of them that we have seen:

  • If the parents decide they want to re-mortgage their property, they will need to have all of their children sign the new mortgage.  An alternate option is to have the children deed the property back to the parents so they are sole owners of the property again.  This basically extinguishes the life estate.
    • Note: If one of the children has a judgment against them, the judgment will attach to the property and must get cleared prior to deeding it back to the parent
    • If the parents don’t pass away but become incapacitated and instead go into a nursing home, the property won’t transfer to the children.  But there is a mortgage to pay – plus taxes, utilities, maintenance etc.  The children can become “stuck” with the home and can’t sell it unless the incapacitated parent has given power of attorney to someone to act on their behalf.  Without a POA or some court action, this property can become the responsibility of the children who have no way to sell it until the parent passes away.
    • If the parents DO pass away, but the property is “upside down” with the mortgage – the children have just been given a liability.
    • The children might not all agree with what should be done with the property.  Family conflicts can arise because of this situation.
    • If the parents want to sell the property, the children will need to deed it back to the parents.  When they do, any judgment against any of the children will need to be satisfied before the property can be deeded back to the parents.

One additional factor to consider when looking at the above:  the way judgments attach to property is different with abstract property than it is with Torrens property.  So the “need to satisfy the judgment” issue is different.

The purpose of this tip is to make you aware that proper tax and estate planning is not just a matter of reading an internet article and then drafting a few documents.  As you work with your customers who are considering some of their options, make sure they are getting sufficient professional advice to make well informed decisions.  If YOU are aware of some of the potential pitfalls and can warn them about them, you might be able to help them avoid some of the unpleasant surprises that are out there.

Disclaimer – this information is NOT legal or financial advice, and should not be used as a substitute for the same.  It is offered for informational purposes only.  Many different factors can influence the proper course of action for a particular situation.  Please seek the advice of a qualified professional for guidance with your specific transaction.