What is the definition of a life estate?

Answer

A life estate is the right to the possession, use and income from a property for the duration of one's natural life. That person cannot leave the property to anyone else in their will. After the life estate holder's death the life estate is extinguished and the property is owned by the fee owners (or remainders) free and clear of the life estate. There are different methods used to create a life estate in different states. Any real property owner who wants to create a life estate should consult an attorney who is familiar with state laws and estate planning who could review your situation and explain the consequences of life estates.

For example, in Massachusetts an elderly couple who owns a home could convey the property by a deed in fee to their adult children. They could reserve a life estate in that deed for each of them. By doing so they could continue to live in the property for the rest of their natural lives and upon their deaths the property would be owned free and clear by their children.

While the parents are still alive, although their children are the fee owners of the property, the children would need the parents' signatures to sell or mortgage the property.

Estate Planning Tool

In the United States a life estate can be used as an estate planning tool. An older person (or anyone) can transfer the title to their property to someone else (their children, for example) and reserve a life estate. That means they no longer own the property but have the right to use and occupy the property for the duration of their natural life. When they die the life estate is extinguished and the property is owned free and clear by the title owners. The need for probate has thus been avoided.

Another common use is for a testator who owns real estate to grant a life estate to a special friend, relative or spouse in their will and devise the title to the property to someone else upon the death of the life tenant. During the life of the life tenant any sale or mortgage of the property by the fee owners would require the consent of the life tenant.

In the case where wealth could be heavily taxed on a person's death, tax laws provide incentives for giving away one's wealth during one's lifetime so as to avoid (not evade) taxes. For instance, if "A" owns an office building that upon A's death would result in significant taxes on A's estate, it may behoove A to make a gift of the building during A's lifetime and reserve the net income for the remainder of A's life. This would make sense if gift taxes would be cumulatively less than estate taxes.