Pros And Cons Of A Life Estate

One way to divide property is by setting up a life estate. Say, for example, you want to leave your home to one person, but when that person dies, you want the home to pass to another person, instead of to someone your initial beneficiary chooses. The premise behind a life estate, a tool commonly used where real estate is concerned, is that the initial beneficiary (who is sometimes referred to as the life tenant) is granted the use of the property for the remainder of their life. Once that person passes away, the property passes to the remainder beneficiary.

Here is one example: You are divorced and remarried. You decide to give your new wife a life estate in your home. When she passes away, the home passes to your children from your previous marriage. That way your wife has a place to live, and your children eventually inherit the home.

As you can tell, life estates are one way to divide the interest in your assets but a life estate can create problems as well.

Lets use real estate as an example. What happens if:

The house needs repairs or major maintenance who pays? If the life tenant is responsible but cant afford the bill, then what happens?
What if the life tenant wants to sell the property? Will the Trust use the proceeds of the sale to purchase a new home, and will that home pass to the remainder beneficiary?
What if the life tenant has to move into assisted living or into a nursing home?

As you can tell, life estates must be carefully crafted to ensure a variety of considerations are taken into account. And no matter how hard you try, a life estate can cause tension between beneficiaries, since both parties have an interest in the property or asset and both parties may disagree on the use of or care of that asset.

If you are thinking about dividing interest in an asset, give us a call. We can help you decide the best way to make sure your intentions are carried out.

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