The attorneys with the Law Offices of Nay & Friedenberg explain how a Life Estate functions.
Property ownership comes in various forms. There are layers of ownership and, depending on the particular layers of ownership, your rights with respect to the property may be limited.
The term “fee simple” describes full and complete ownership rights. This includes the rights to occupy, possess, and enjoy the property. This also includes the right to sell, transfer or will it to another person. The owner of a fee simple interest does not lose his or her rights until he or she takes affirmative steps to transfer the interest.
A life estate has more limited rights. A life estate holder has the same rights to occupy, possess, and enjoy the property, but those rights immediately cease upon the owner’s passing. The life estate holder cannot will the property to another person. Although technically a life estate holder could sell his or her life estate interest to another person, the reality is that it is unmarketable. The buyer’s rights would end upon the life estate holder’s death. No one would pay for those kinds of rights.
Why would someone want a life estate if the rights are somewhat limited? Creating life estates can be useful estate planning tools in certain situations. For example, they are often used to avoid the probate court process after death. As an example, Dad wants to give his house to his two sons, but he wants to continue to live in it until his death. He could make a gift of the house in his will to his two sons, but he knows that his estate will have to go through the probate court process in order to transfer ownership to his two sons. Looking to find a way to avoid the probate process, Dad signs a deed. The deed reserves a life estate interest for himself in his home, but a remainder interest to his two sons after his death. Immediately after Dad’s death, the ownership of the property transfers immediately to the two sons. The two sons now have fee simple ownership rights in the house. They do not need to file a probate in order to transfer ownership. They simply record a death certificate in the county records.
In that example, Dad, as a life estate holder, would continue to pay the property taxes, insurance, maintenance and other ownership costs during his life. His sons would not have any rights to move onto the property or to sell it prior to Dad’s passing. This is a win-win for Dad and his sons. However, this kind of arrangement could be problematic if Dad were to ever need to sell the property during his life, because a life estate interest is unmarketable.
Life estates may also be useful for married couples planning for the possibility that one spouse will likely outlive the other spouse. For example, Mary and Bob married later in life and each have children from previous marriages. When they married, Bob moved into Mary’s house. Mary wants Bob to live in that house if she predeceases him, but ultimately, she would want her kids to receive the house as part of their inheritance. Mary can grant Bob a life estate interest in the event that she predeceases him. Bob can live in and enjoy the home for the rest of his life, but immediately upon his death, ownership will transfer to her kids. In that scenario, Bob would not have the ability to sell or will the house to anyone else and Mary’s kids could not lose their inheritance from Mary.
Careful thought should be given to the use of life estates in estate planning. Once established, generally they are irrevocable. Consult with your estate planning lawyer to determine if a life estate would fit your situation.
An experienced estate planning attorney makes all the difference in making sure you have the proper documents to fit your family’s needs. Contact the Estate Planning attorneys with the Law Offices of Nay & Friedenberg in Portland, Oregon at (503) 245-0894 to set an appointment.