Potential Consequence with Life Estates
May 31, 2011
A "life estate" is an estate planning tool that involves a legal arrangement where a land owner gives the ultimate ownership ("future interest") of their land, retaining the right to use and income from the land for the remainder of their life. This is done through a deed, and once complete, the land owner is now the "life tenant", and when they pass away, the "future interest holder", receives full ownership, outright.
Often, people view these as something to do immediately, especially if they live in a state where a life estate would offer various asset protections (state specific). However, there are some potential consequences associated with life estate transactions that often go over-looked or unadvised.
One major consequence of a life estate is the fact that it is a FINAL transaction. Once it’s given, it’s done. Options for changes based on future events become very difficult, if not impossible. For example, if the person you give the future interest to passes away, the deceased’s estate plan determines who the successor owner is, NOT the person who originally gave the life estate. This often leads to the ultimate ownership resting with someone whom the original owner did not intend. Unfortunately, many times these lead to negative consequences, such as the land "leaving the family."
This is one of many potential unintended consequences associated with a life estate. The bottom line: life estates are good tools, but must be carefully analyzed from all angles, especially your comfort level with not being able to change them unilaterally once they’re given.
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