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Table of Contents Expand. What Is a Life Estate? Understanding a Life Estate. Special Considerations. Pros and Cons of Life Estates. Life Estate vs. Irrevocable Trust. Example of a Life Estate. Life Estate FAQs. The Bottom Line. Key Takeaways A life estate is a type of joint property ownership. Under a life estate, the owners have the right to use the property for life. Typically, the life estate process is adopted to streamline inheritance while avoiding probate. The life tenant retains all the rights and responsibilities of an owner except the right to sell or mortgage the property.
Pros Simplifies the transfer of a home to the next generation Protects the home from debtors of the deceased Allows older homeowners to retain the benefits of home ownership. Cons Makes the owner vulnerable to debt actions brought against the remainderman Can't be undone easily if the owner's plans or circumstances change Restricts owner's ability to mortgage or sell property.
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Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace. Related Terms What Is a Remainderman?
A remainderman is the person who inherits or is entitled to inherit the principle of a trust once it is dissolved. Tenancy in common TIC is a way for two or more people to maintain ownership interests in a property.
Joint owners can own differing percentages. What Is a Deed? A deed is a signed legal document that transfers the title of an asset to a new holder, granting them the privilege of ownership. What Is an Account in Trust? An account in trust is a type of financial account opened by one person for the benefit of another. Pennsylvania, for instance, makes no such distinction. Typically, though, a lender will not allow it and will either insist that your children sign the mortgage papers or have you do a new deed taking the children out of title and transferring the property back to you as full owner and not as life tenant.
Right, wrong, good or bad a lender makes every loan with an unspoken thought of what happens if the borrower eventually defaults and stops paying. If that happens, they may have to foreclose on the house in order to recoup some of their losses. If you were only a life tenant and the remaindermen your kids did not sign any mortgage papers, then the lender might not be full owner of the house after a sheriff sale.
Whether handling PA title insurance, MD title Insurance, NY Title Insurance or any other state for that matter we will run the title and advise the lender how the deed is held. At that point though, each lender and each state has its own rules in regards to life tenants. Transferring the house to your kids while retaining the right to live there until you die is a good way to ensure that the kids inherit your house without their having to go through the courts.
Life estates add the intended heirs onto the deed as remainder owners, while keeping all rights to use and live in the home for the owner. However, life estates have some disadvantages, especially if the homeowner needs to take out a home equity loan. Similar to mortgages, home equity loans provide tax incentives to borrowers because interest payments are tax-deductible for taxpayers who itemize.
Because home equity loans allow the lender to place a claim against the property, all owners listed on the deed must agree to the terms of the loan. Typically, property owned by life estate has two types of owners: the life tenant and the remainder owner.
Making the decision to grant someone remainder ownership of a life estate means adding that person as a full owner with certain rights reserved for the life tenant. The life tenant cannot unilaterally reverse a grant of life estate, but needs the agreement of all owners to affect the ownership of the property.
When you take out a home equity loan, just as with any other mortgage, you give the lender certain rights over the property in the event you default.
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