HOW A LIFE ESTATE DEED CAN HELP YOU AVOID PROBATE

A Revocable Living Trust can be used to effectively reduce if not avoid the need for the probate of an estate in Florida – provided that the Trust is adequately funded and that all the remaining assets in the estate carry independent beneficiary designations.

However, when your largest asset is real property, the use of a special kind of deed, known as a life estate deed, may be considered as an option to avoid the probate process given the cost effectiveness of such a deed. This is so provided that your real property is not mortgaged, that the beneficiaries to whom you want your real estate conveyed to following your death are adults who do not receive certain types of government benefits, and that you would like your property distributed immediately upon your death with no restrictions as to when or how the real property is to be used following your death.

But… what exactly is a life estate deed? 

There are two types of life estate deeds in Florida that work similarly.  The main difference is that the first type of life estate deed, known as a beneficiary deed or transfer-on-death deed allows you to keep a life estate and transfer a remainder interest (the estate that remains after your death) to the person(s) who will inherit your real property.  This means that you would have the right to occupy and use the property during your lifetime, including the right to receive any monies generated by the property since these deeds don’t take effect and transfer property to the beneficiary(ies) until after death.  However, the one limitation of a “regular” life estate deed is that you give away unilateral control of the property, meaning that you may not sell, mortgage or transfer such real property without the consent and joinder of the beneficiaries you have named on the deed.  This means that your beneficiaries’ creditors may place a lien on your property since they cannot claim the home as their homestead property.  Moreover, if any beneficiary passes away or goes through divorce, his or her spouse may also claim an interest in such real property.

Contrast this with the second type of life estate deed which is also available in Florida, known as an enhanced life estate deed or Ladybird Deed (the Florida lawyer who created this type of deed apparently named it after President Lyndon B.  Johnson’s wife, known as “Lady Bird” Johnson).  Unlike with regular life estate deed, you as the owner retain complete control over the property during your lifetime.  This means that the enhanced life estate deed allows you to sell, mortgage or transfer your property during your lifetime without the consent of the beneficiaries you have named on such deed.  In addition, with an enhanced life estate deed, you need not pay any gift taxes because you have the unilateral right to cancel the remainder interest conveyed to your beneficiaries.  Another benefit of an enhanced life estate deed is that it doesn’t count as a transfer and generally won’t make you ineligible for Medicaid as long as you express your “intent to return” even after being taken to a nursing home (the “intent to return” can be expressed in the form of an affidavit or letter signed by you), and even if you do not express the “intent to return”, your home may be considered as an exempt asset for Medicaid eligibility as long as your spouse or relative occupies it when you’re not around. Notwithstanding the foregoing, you should always consult with your lawyer prior to signing this type of Deed for Medicaid purposes. In practice, this is the way it works:  You as the owner of your real property have a deed drafted which named your beneficiaries as the Grantees.  You retain a life estate upon the property with the right to sell any time you want without the permission of any of your beneficiaries.  You may revoke the Deed at any time, and, if (and only if) the property is not sold, mortgaged or otherwise transferred during your lifetime,  it will pass on to your named grantees (beneficiaries) without the need for probate.

Therefore, an enhanced life estate deed enables your real property to pass to the persons you have designated on such deed immediately upon your death without any Court interference, while allowing you to retain a life estate – the right to live in such property for the remainder of your life.    In addition to the protection from probate mentioned above, this type of Deed will also provide you with the following benefits:

 

  1. Conveyance of the remainder interest: You may sell, transfer, or mortgage the subject real property during your lifetime, or otherwise cancel the remainder interest for any reason whatsoever, since your beneficiaries do not receive legal title to the real property until you die.   This means that you will continue to be the owner of the subject property until you die, and should you decide to sell during your lifetime you would be under no obligation to notify the beneficiaries named in the enhanced Life estate deed.

 

  1. Protection from creditors: It protects the property from the beneficiaries’ creditors during the grantor’s lifetime. The creditors cannot place a lien on the property (including judgment liens and tax liens), because the beneficiaries have no interest during the grantor’s lifetime.

2.No capital gains tax:  Your beneficiary inherits the property as a “stepped-up” basis, which is the value of the            property on the day you pass away. If your beneficiary sells your home, obviously there will be no capital gains         and hence your beneficiaries do not have to pay any capital gains tax.

3.Flexible rights:  You are legally entitled to sell or transfer your property as a gift any time you wish to do so            without having to obtain the permission of any beneficiary. You may also take out a mortgage on the property          or cancel the remainder interest.

The foregoing benefits of the above life estate deeds offer a viable, subject to the restrictions stated herein, can provide a less expensive alternative to a Revocable Living Trust, as long as your real property is to  be distributed outright to your beneficiaries and without any special instructions for distribution.

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