What is a California Life Estate?
If you’re looking for a way to provide shelter for a loved one after you die, while preserving your home for a different ultimate beneficiary, a California life estate may be worth investigating. Here’s an introduction to what a California life estate is, how it works, and the pros and cons.
Defining a California Life Estate
A life estate is a form of ownership that allows one person to live in or on a piece of real property until they pass away. At their death, the real property passes to the intended beneficiary of the original owner.
A life estate can be a useful estate planning tool, especially for couples who re-marry and want to preserve an inheritance for children from a previous marriage. Some people who are on their second (or more) marriage bequeath a life estate to their new spouse. This ensures that after their passing, their partner can continue to live in the property but will not be able to sell or transfer the property title.
After the surviving spouse passes away, the children from a previous marriage who were named as the life estate remainder owners will become the ultimate beneficiaries of that piece of real estate.
How Does a Life Estate Work?
A life estate establishes two interests in the real property: the Life Tenant Owner and the Remainder Owner (also known as the Beneficiary).
The Life Tenant Owner:
- Maintains the absolute and exclusive right to use the property during their lifetime.
- Can be a sole or joint Life Tenant.
- Usually maintains responsibility for insurance and general maintenance.
- May rent out the property and collect any income generated by charging rent.
The Remainder Owners:
- Automatically take legal ownership of the property immediately upon the death of the last Life Tenant.
- Have no right to use the property or collect income generated by the property.
- Are not responsible for property maintenance as long as the Life Tenant is still alive.
Advantages of a Life Estate
Here are four advantages of creating a life estate:
- Cost and Ease: A life estate is simple and inexpensive to establish. Transferring title after your death is also quick and easy.
- Probate Avoidance: Life estates avoid a California probate. When the last surviving Life Tenant dies, the property automatically transfers to your heirs.
- Life Tenant Benefits: A life estate protects the Life Tenant’s right to use and occupy the property. The Remainder Owner’s financial problems don’t affect the Life Tenant’s absolute right to the property during their lifetime.
- Tax Advantages: The remainder heirs will get a stepped-up tax basis for capital gains purposes as of the date of the grantor’s death (if the life estate is created upon death).
Disadvantages of a Life Estate
Using a life estate isn’t right for everyone, which is why it’s critical to consult an experienced estate attorney before creating one. Here are three potential disadvantages to a life estate:
- Tax Consequences: If the property is sold while the Life Tenant is still alive, there may be income tax consequences. Life Tenants do not receive the full income tax exemption available when a personal residence is sold. Remainder Owners do not receive any income tax exemption. Any capital gains tax due would be owed from the Remainder Owner’s share of the house sale proceeds.
- Difficult to Sell: Given the Life Tenant’s rights to occupy or rent the property, it may limit the buyer’s willingness to purchase a property where a life estate tenant is involved.
- Permanence: Transfer of property into a life estate is irrevocable. But if all the Life Tenants and Remainder Owners agree, a change can be made. If the life estate is created while the grantor is living, then the grantor severs ownership rights to the property.
How to Create a California Life Estate
Here’s how to create a life estate:
- Consult an estate planning attorney to explore whether a life estate is right for you.
- If you decide that a life estate is appropriate, hire the attorney to draft a life estate deed for you and record it in the county where the property is located; or,
- The attorney could include a provision in your estate plan to create a life estate in the property upon your death.
If you have any questions or would like to schedule a no-cost consultation to discuss a California life estate, please feel free to contact our law firm.
Law Offices of Daniel A. Hunt
The Law Offices of Daniel A. Hunt is a California law firm specializing in Estate Planning; Trust Administration & Litigation; Probate; and Conservatorships. We've helped over 10,000 clients find peace of mind. We serve clients throughout the greater Sacramento region and the state of California.