Which Deed Do I Need?

Life Estate Deed vs. Transfer on Death Deed

Estate planning offers choices in how to structure your plan. In an effort to avoid probate, clients often want to discuss using a deed to automatically transfer real estate to their children. The choice is whether to use a Life Estate Deed (“LE”) or Transfer on Death Deed (“TOD”).

Both deeds will transfer the real estate upon death without probate. This may be problematic, however, if there are multiple beneficiaries on the deeds or a beneficiary with legal or financial issues when the property is transferred. Both deeds will allow for a cost basis adjustment on death to help eliminate any capital gain. Both deeds require the current owners to pay for all taxes, insurance, utilities, etc., related to the property.

The TOD works like a beneficiary on a life insurance policy. The beneficiary of a TOD has no ownership in the property until the current owner dies. This means that if the current owner wishes to sell the property, the TOD beneficiary does not take part in the sale or receive any of the proceeds of the sale.

A TOD is a good choice if you are looking to keep full ownership and have flexibility to sell the property and not share the sale proceeds. It also avoids unexpected tax issues for the beneficiaries if the property is sold during lifetime.

A LE actually splits the ownership of the property so that the current owners (the “life tenants”) own the property during their lifetime. The value of this interest is a percentage of the total value of the property, determined by the life tenant’s age. The future ownership of the property is actually owned by the “remaindermen.” This means that the owners, whether life tenants or remaindermen, can sell or encumber their individual interest in the property without consent by the other owners. Because the property has multiple owners, if the property is sold, all owners must take part in the sale and receive their share of the sale proceeds. The transfer of the remainder interest when the deed is made is a gift, so gift tax consequences must be analyzed, too.

A LE is helpful if the current owner needs to reduce the value of the property they own without giving up control. The life tenant may also want to shift some capital gain to the remaindermen when selling the real estate during the life tenant’s lifetime.

If you think one of these deeds may help carry out your estate planning goals, or whether one of these deeds would be a good alternative to a trust, please contact our office to schedule a consultation today.