Many individuals use life estate deeds in an effort to avoid probate and eliminate the need to hire an attorney to prepare a last will and testament, or a trust.  Unfortunately, when someone uses a life estate deed, they lose control over the distribution of their property when things turn out differently than expected.

What Is a Life Estate Deed?

A life estate deed is a transfer of the ownership of the real property that is the subject of the deed to one or more persons (the “remainderman”), while retaining ownership of a life estate in the property by the person(s) transferring the property (the “life tenant”).  A life estate is the right to occupy and use the property, or the benefits of the property, during one’s life time.

What is the Purpose of a Life Estate Deed?

Typically, the purpose of a life estate deed is to provide for the transfer of the property to the desired person(s) (remainderman) automatically at the death of the property owner who retained the life estate (“life tenant”), without the necessity of probate.  Ownership of the property transfers automatically upon the life tenant’s death.  All that is needed to perfect title in the remainderman is the recording in the public record of the death certificate of the life tenant.  Title to the specific parcel of real property passes, by operation of law, to the remainderman without probate and free of all claims of creditors of the life tenant (but subject to any legally enforceable lien on the property, such as a mortgage, home equity loan, or tax lien).

Transferring real property through a life estate deed also means the specific parcel of real property is not controlled by the life tenant’s will or trust, so probate is avoided.  The same treatment applies to assets that pass by way of beneficiary designations or joint ownership of property with the right of survivorship.

Sounds Simple – What Can Go Wrong?

The problem with life estate deeds is that the person transferring ownership loses control of the property when the deed is signed, despite the retention of the life estate.  After the life estate deed is signed and recorded, the life tenant is no longer able to transfer, sell or mortgage the property without the joinder of the remainderman.

More importantly, from the estate planning perspective, the life tenant has given up all control over what happens to the property in the event of the death or disability of the remainderman, or if the remainderman is embroiled in a divorce or other creditor problem when the life tenant dies.  The real property will automatically transfer to the remainderman without the ability to change the remainderman or protect the remainderman from creditors.

What is The Problem With Loss of Control?

Unfortunately, none of us know when we, or our loved ones, will die.  But, we all know that we all will die someday.  Here’s an actual case that came into our office recently (the names have been changed to protect the innocent).

We represent Jane Doe, the daughter of John Doe, Sr.  In 2000, John Doe, Sr. signed a life estate deed.  He retained a life estate for himself and his wife, who was not the mother of his children.  The remainder interest was transferred to his three children from his first marriage, John Doe, Jr., James Doe, and Jane Doe, our client, as tenants in common.  Upon John Sr.’s death, his wife would continue to have the right to occupy the property, and upon her death, the property would automatically transfer to his three children.  The transfer of the property to the children as tenants in common means that each child has an undivided one-third (1/3) interest in the property upon John Sr.,’s death.

John Doe, Sr. died in 2012.  His wife remains in the house as the life tenant.  She is 97 years old, and presumably will be forfeit her right to the life estate within the near future.  Jane Doe, our client, is concerned about the current state of the title for the real property, and wants to inspect the property to see if it is being properly cared for by her step-mother.

The reasons for her concern relate not only to the status of the property, but because both of her brothers predeceased their father.  Since the two brothers are no longer living, who gets their ownership interest in the property?  The answer to that question revolves around when did their interest in the property “vest.”  An interest in real property “vests” when all actions necessary for legally transferring the ownership interest of the property have been completed.  With a life estate deed, the remainderman’s ownership interest vests when the deed is signed and delivered (or recorded in the public record).  Accordingly, the children’s ownership interest in the property vested upon their father signing the deed and recording it in the public records, or the year 2000.

John Doe, Jr. died in 2006, without a will.  He was married, with no children.  However, he and his wife were in the middle of a divorce that had not been completed.  Based on the Florida law of intestacy, John Jr.’s ownership interest transferred to his wife immediately upon his death in 2006.  His wife’s ownership interest in the property vested at the time of his death.  Unexpectedly, two months after John Jr.’s death, his wife committed suicide. She was survived by a daughter from a previous marriage.  Upon the wife’s death, her daughter’s ownership interest in the 1/3 interest in the property vested.  Her last known whereabouts was in Germany, several years ago.

James Doe died in 2009, without a will, survived by his wife and a son.  Accordingly to the Florida law of intestacy, his wife is entitled to the first $60,000 from his estate, and then his wife and his son will divide his estate into equal shares.  Probably, James Doe’s ownership interest in the subject property was worth less than $60,000, so his interest passed to his wife.  But, if he had $60,000 of assets other than the property at the time of his death, then the property will be owned 1/2 each by his wife and his son.  Only a probate of his estate will determine exactly what interests were received by his wife and his son.  If part of James Doe’s ownership interest did transfer to his son, there will need to be a probate of the son’s estate because he died in 2011, unmarried and without a will.  Based on the facts as we know them now, the ownership interest of the son will transfer to his mother through the son’s probate.

John Doe, Sr. thought that through the use of the life estate deed he was avoiding probate, and avoiding the expense of visiting an estate planning attorney to prepare a will or trust.  As a result of the deaths of his two sons after he signed the life estate deed, but before he died, he now has lost control totally over where the property will go, and created the need for at least three probate proceedings, and possibly a fourth.

John Doe, Jr.’s estate must be probated, and then his wife’s estate must be probated.  The ownership of his one-third interest in the property will likely end up in the hands of his son’s, wife’s daughter from a previous marriage, i.e., someone who is not related to him at all. Tracking down the daughter will likely incur significant expense, since her last known address was in Germany, and was several years ago.

James Doe’s estate must be probated, and probably his son’s estate will need to be probated as well.  James Doe’s wife will likely end up with his one-third interest in the property.

Jane Doe, our client, upon the death of her step-mother, will own an undivided one-third interest in the property, along with her deceased brother’s step-daughter (1/3) from a marriage that was in divorce proceedings at his death, and her other deceased brother’s widow (1/3).

Not exactly what Dad wanted!

All of these issues could have been avoided through a properly drafted will or trust. Compared to the costs associated with four probates (the filing fee with the probate court clerk will be almost $2,000 for all four), and the fact that his only surviving child will own only 1/3 of the property when all is said and done, the costs of consulting an estate planning attorney and having a proper will or trust drafted is truly de minimis.

The moral of this story is summarized in the old adage, “don’t be penny wise and pound foolish!”  If you want to control what happens to your assets at death, consult with an experienced estate planning attorney.  The cost is well worth the peace of mind that comes from knowing that your assets go to the people you want, when you want, and in the manner you want, without losing control of the end result.

 

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