FSBO Midwest

FSBO Midwest

How Life Estate Deeds Work

Life estate deeds work by dividing the property into two types of interests. One interest is measured based on the owner’s lifetime and is called a life estate. The interest that passes at the owner’s death is called a remainder or remainder interest. The life estate and remainder interest are then transferred to different owners. There are three categories of owners:

Current Owner (Grantor) – The person creating the deed is called the grantor.
New Owner (Life Tenant) – The person who owns the life estate is called the life tenant.
Future Owner (Remainder Beneficiary) – The person who will acquire the property when the life tenant dies is called the remainder beneficiary or remainderman.

As with other deeds, these terms refer to different types of owners, not to specific individuals. The same party may serve in multiple roles. The current owner (grantor) is usually also the life tenant. Similarly, multiple individuals may serve in the same role. For example, there may be two grantors, three joint-life tenants, and one remainder beneficiary.

Example: Peter creates a life estate deed transferring his property to himself, as life tenant, with the remainder to Paul and Mary. The effect of this deed is to retain a life estate for Peter as a life tenant. At Peter’s death, the remainder interest will automatically transfer to Paul and Mary.

Note: As discussed below, there are two types of life estate deeds: Traditional life estate deeds and ladybird deeds, also called enhanced life estate deeds. This article focuses primarily on traditional life estate deeds. See our discussion of ladybird deeds for more information about enhanced life estate (ladybird) deeds.

How to Create a Life Estate Deed

The creation of a life estate deed can be tricky. It is important to include the right language to create the life tenant relationship. If multiple parties will serve in the same role—for example, if there are multiple life tenants or multiple remainder beneficiaries—it is important to also include language that defines the relationships within that role, including the form of co-ownership for multiple remainder beneficiaries.

Comparison to Other Deed Forms

A life estate deed is not the only way to transfer property at death. Property will automatically transfer to the surviving owner at death if it is titled with the right of survivorship (as tenancy by the entirety, joint tenants with rights of survivorship, or community property with rights of survivorship). With these forms of co-ownership, the owners have simultaneous possessory rights. Each owner can occupy or use the property at the same time.

A life estate deed is also a form of co-ownership. Both the life tenant and the remainder beneficiary have real interests in the property. But unlike other forms of co-ownership, they do not have property rights at the same time as each other. Instead, their interests are stacked in time. Only the life tenant has a right to current possession of the property. The remainder beneficiary’s interest does not begin until the life tenant’s death.

Comparison of Life Estate Deeds to Lady Bird Deeds and TOD Deeds

Life estate deeds avoid probate at death, but at the cost of sacrificing control during life. The transfer of an interest to the remainder beneficiaries gives the remainder beneficiaries present rights to the property. Even though the remainder beneficiaries do not have possessory rights to use the property while the life tenant is still alive, the life tenant cannot convey or mortgage the property without the consent of the remainder beneficiaries. The life tenant also owes duties to preserve the property for the benefit of the remainder beneficiaries and must take their interests into account in making decisions.

Many people would prefer to avoid probate at death without sacrificing control during life. In the past few decades, an increasing number of states permit the use of other deed forms that avoid probate without loss of control. The two predominate deed forms are:

TOD Deed – A TOD deed (also called a beneficiary deed or transfer-on-death deed) allows the owner to name a beneficiary on the deed, similar to naming a beneficiary on a life insurance policy or bank account. During the owner’s life, the owner can freely revoke or change the beneficiary designation without involving or even notifying the beneficiary. Unless the designation is revoked, the property passes to the surviving beneficiary at the owner’s death.

Enhanced Life Estate (Lady Bird) Deed – Recognized in only a handful of states, the ladybird deed “enhances” the traditional life estate deed by giving the life tenant the power to revoke the deed or transfer the property to other owners without involving the remainder beneficiaries.

Like a traditional life estate deed, both ladybird deeds and TOD deeds avoid probate on the death of the life tenant. But unlike a traditional life estate deed, the original owner reserves the right to freely deal with the property without involving the beneficiary. The owner may change the beneficiary or undo the deed, all without the beneficiary’s consent or involvement. This flexibility often makes ladybird deeds and TOD deeds popular alternatives to life estate deeds for avoiding probate.

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