First, I want to preface that I am not an attorney and nothing written in this article should be construed as legal advice. The main thing we should all do is avoid probate, which is very expensive and time-consuming. A life estate will avoid probate but is very restrictive.
For the purposes of this article, I will refer to the person granting the life estate as Pebbles. The fee owner is the person who is the underlying owner of the property exclusive of the life interest granted and will be referred to as Barney. Some people think a life estate is better, cheaper, and easier than a trust. I can respect their choice. However, once the owner of the property conveys their interest to someone and keeps a life estate, they lose the flexibility to sell the property or make changes. Typically life estates happen when everyone is friendly and cooperative. What happens if the relationship changes? There is also the issue of who pays for maintenance, property taxes, insurance, etc. What happens if Pebbles wants to upgrade the home? Should she be responsible for this if she doesn’t own the property?
Another complication is Pebbles cannot still sell the property or transfer the life estate to someone else unless Barney agrees to the sale. Pebbles has a life estate that gives her the right to use the home only during her lifetime, but she is not the actual owner of the property. Once life estate is issued there is no going back unless Barney agrees. In addition, what happens if Barney dies? The property would transfer to a different person and who knows how the situation may change. The new fee owner could try to force Pebbles out of the house by using failure to maintain or something else that allows a life estate to be severed.
What happens if things change due to circumstances beyond anyone’s control? Pebbles’ wishes the day she signed the property over to Barney may differ a year later. For example, Pebbles can no longer live independently and needs to go into assisted living. Now she needs money from the property but she cannot sell it because she only has a life estate. In addition, if she moves Barney can sever the life estate as it requires her to occupy the property. If Pebbles marries and wants the spouse to live in the property after her death it cannot happen because her life estate ends when she dies. Pebbles may have assumed the person who received the fee interest (assuming they received the interest for no compensation) might help her out financially. What if Barney will not agree because he doesn’t have the money? What if the financial help requires Pebbles to give up her life estate so the property can be sold and she does not want to do this?
From Barney’s perspective, there are also issues. Pebbles has married and her spouse, Fred, and his two children are occupying the property. Pebbles dies and Fred and his children refuse to leave the property. Now Barney has to go through the eviction process to get Fred out. If Pebbles left her personal property to Fred then Barney has to wait for Fred to remove the property. The law says Barney must give Fred a reasonable time to remove the property. The question is what is considered reasonable? If Fred drags his feet then Barney will have to serve notice and give Fred a deadline. If Fred becomes unhappy and destructive he could damage the property. It is unlikely Barney would be able to get monetary compensation from Fred without a lengthy and expensive court battle.
In my opinion, trusts are the best way to deal with properties. I would never advise anyone to use a life estate versus a trust. There are just too many pitfalls and a lack of flexibility to make future decisions about the property.
More information about the various documents that should be part of your estate planning is outlined below.
Trusts – If you have a large estate you may want to consider putting your assets in a trust. A revocable living trust will require you to transfer property after death to loved ones. It is called a living trust because it is created while the property owner, or trustor, is alive. It is revocable, as it may be changed during the life of the trustor. The trustor maintains ownership of the property held by the trust while the trustor is alive. The main thing you want to do is avoid probate, which is very expensive and time-consuming. Another key factor is if you don’t have a will or a trust the state where you live will decide what to do with your estate. This is worth repeating because the last thing I want is a state government deciding what to do with my assets. You should also know that the terms of the trust are not controlled by the last will and testament of that person. In fact, one of the primary reasons to use a trust is to avoid probate and issues relating to a will. Wills can be contested and often are thrown out. Trusts can be contested but these cases are much harder to win.
For simple estates, the attorney consultation to set up a trust is relatively inexpensive. For example, my attorney offers a trust package, including an attorney consultation, starting at $625.00. Most of the information is entered online and then reviewed by an attorney to finalize the document. There is a free fifteen-minute consultation to determine what is right for your situation. Please contact me if you would like a referral. The whole goal of doing a trust or life estate is to avoid the expense and hassle of probate.
Living Will – A living will is a written, legal document that spells out medical treatments you would and would not want to be used to keep you alive, as well as your preferences for other medical decisions, such as pain management or organ donation. Mayo Clinic says “Even if you already have a living will that includes your preferences regarding resuscitation and intubation, it is still a good idea to establish DNR (do not resuscitate) or DNI (do not intubate) orders each time you are admitted to a new hospital or health care facility.”
Financial POA – If you are sick who is going to pay your bills? Who is going to file insurance claims? This POA eliminates the need to add someone to the account as it only applies if you are incapacitated. It is important to note that this POA is only in effect while you are alive.
A Will (also known as Last Will and Testament) – This document states what you want to be done with your estate and who will be in charge of handling the details called an Executor or Executrix. Be sure to ask the person you want to be in charge of handling an estate it is not a fun or simple task. Another key factor is if you don’t have a will or a trust the state where you live will decide what to do with your estate.
Disclaimer – I am not an attorney. However, over the years I have dealt with many families struggling to settle estates. If there had been a few pieces of paper put in place it would have been so much easier. The family could have concentrated on grieving rather than paperwork. In one case the family was at odds on how to handle the medical decisions. If there had been a living will in place it would have saved thousands of dollars in medical bills, fighting between the family members and their relative’s pain and suffering because she stayed on life support for far too long.