When discussing life estates, questions often arise, such as what rights does the grantee have? What are the advantages and disadvantages of a life estate? A life estate occurs when a grantor conveys a property to a grantee, or a remainderman, giving the grantee all legal rights, or the remainder interest, of the property after the grantor dies. In this particular conveyance, the grantor continues to have an interest in the property until their death. The interest allows the grantor to continue to utilize the property.
A life estate differs from a trust as a result of the grantee only obtaining legal rights to the property after the grantor dies, whereas a trust automatically gives the grantee legal control of the property. A remainderman has no duty of care associated with the property until the grantor dies. For example, if the current owner rents the property, the remainderman holding an interest in the property does not have any duty of care towards the tenants. In terms of time and efficiency, there are some benefits the life estate has including that it allows the grantor continued use of their property and it avoids probate as a result of there being no need for a will to be involved in the particular estate conveyance. With no probate, there will be no drafting of a will, and subsequent need of an executor to distribute interests to the beneficiaries. Distribution of interest after death through probate would take a substantially longer time than the automatic conveyance of a life estate.
In terms of taxes on the particular property, there is an easy transfer from grantor to grantee, and usually there is not an estate tax. There needs to be a gift tax return filed on items that are more than $11,000 in value which involves estates, and often the this tax is lowered by use of a life estate. One disadvantage to the life estate is if the property is sold, a cut of the profit must be paid to the life tenant. In that particular situation, the property will be split between the life interest and the remaindermen. The sale by the grantor would require the signature of the remaindermen. The gain of the life interest is eligible for exclusion up to $250,000 when the grantor has used the property as their principle residence for at least two of the last five years. On the other hand, the gain of the remainder interest is not eligible for exclusion.