What is a Life Estate?

When an owner of a home signs a life estate, they are basically passing part of the ownership of a home to another person. This could be thought of as a way to pre-gift your home to your heirs while still retaining joint ownership and the right to live there.

What is A Life Estate Deed

A life estate deed permits the property owner to have full use of their property until their death, at which point the ownership of the property is automatically transferred to the beneficiary.

These deeds are typically created when a person wants to pass a piece of property to an heir without the need for a will or for the process of probate after they pass away. In the right situations, it can be a streamlined and easy way to transfer ownership.

How Does An Equity Share Life Estate Work?

An Equity Share Life Estate creates a sort of legal joint ownership of a piece of property. For example, let’s say a woman wants to pass her home to her son when she passes away. But, she has a limited income and finds herself in need of home care. A friend (investor) offers to give her $400,000 cash, in exchange for 50% of the equity in her home. She agrees, they get an appraisal on the home and agree that the value of the home is at $950,000. They put together an Equity Share Life Estate contract, which is recorded at the Bureau of Records as a lien on the property.

The contract establishes a life estate for her home, which would make her the life tenant

and her son and the friend, the remaindermen or beneficiaries. She can continue to live

in her home for the remainder of her life if she chooses to and is responsible for making

property tax and insurance payments.

While it doesn’t sound like much has changed, it has. As a life tenant, the mom no longer

has full control over her house. She’ll need to get approval from her son and the investor to make large changes like selling it or taking out a mortgage. She also can’t revoke the life estate without both their consents, so it’s important for her to make sure it’s the right solution for her family.

Upon her death, the house title would be immediately passed to her son and the investor as the beneficiaries (remaindermen). Rather than going through probate, the only thing that would need to be done to pass ownership is to file her death certificate.

In the eight years that past, between the Agreement and her death, the house has gone through some appreciation and is now worth $1.6 million dollars. The life estate contract states that once she has passed, the investor must be paid back. A new appraisal is done, to establish the home’s value at the time of her death, and the son has the option to get a mortgage or to sell the property, in order to pay the investor his 50% share of the new appraised value. So, if the house is Sold for $1.6, essentially the investor and son both get $800,000 from the sale. Since they are the beneficiaries, the money is tax free.

What About If Mom Decides to Sell?

What happens if Moms decides to sell the property before she passes away? This situation occurs every so often. Mom decides to sell the home and move into a full time care facility. Upon the sale of the home, she must pay back the investor. But, it is not a 50/50 split. Using the same sales price of $1.6 million, she would have to pay the investor back the $400,000 that was lent to her, plus 50% of the equity that was gained during that time. In the eight years, the property increased in value an additional $650,000 ($1,600 - $950=$650). Half of that would $325,000 + $400,000= $725,000.

Keep in mind, there would be some tax consequences from this transaction. The sale proceeds will be split based on IRS actuarial tables. It should be looked at and discussed with a tax attorney. Life Estate or not, most times it is better to hold on to the property, leaving it to your beneficiaries, so there would be no tax owed.

Equity Share Life Estate contracts are an option to a reverse mortgage. Both are valuable options for some families seeking to simplify the estate planning process. It’s also a way to protect the home from Medicaid estate recovery. If a person needs care and is eligible to receive Medicaid, the government may try to recover the costs of the care from their estate once they pass away. A life estate can protect the home from being included in the Medicaid recovery process as it immediately passes to beneficiaries.

Written by Donald Dietz of Hawaii Equity Life Estate. It is highly recommended that you should consult your tax attorney and make your own decisions. All transactions are different and this article should not be taken as legal advice. Equity Share Life Estate may not be the best path for all parties and advises that careful consideration be given to all decisions relating to one's home.

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