Life Estate Deed Gone Wrong

Life Estate Deed Gone Wrong| Rapid Home Deals 352-480-0955

How to lose your house doing the right thing

Good morning. It’s Friday once again, and it’s time for Fan Mail Friday, where we answer questions from sellers, just like you.

Now this week, we have a question from a lady who wanted me to buy her house. There was a problem with this house. She created a life estate, but the way the life estate was written is, well, you’ll hear the story. Now, many times when an older person creates, or will deed their home to their heirs and grant themselves a life estate, or it’s called the lady bird deed sometimes. Now what this means is they can live in the house until such time as they pass away. Now, most lady bird deeds or life estate deeds have wording in them that gives a person who is the grantor, the one who creates the life estate for themselves, it gives the grantor the power to sell, to lease, or otherwise dispose of the property until such time as they pass away.

Now, our seller this week did not do that. What she did is she simply deeded the house to her heir and left herself the ability to stay in the house until she passed away. Now go forward 13 years, the son has now passed away and the mortgage she took out on the property is going unpaid and the bank is getting ready to foreclose. So the lady who granted herself the life estate is about to have her house sold out from under her. Her heart was in the right place, but the way that the attorney drew the paperwork up, and who knows, she might have asked for it to be done this way, but the way the attorney drew the deed up, didn’t build any fallback position for her in the case of this lady’s life estate. So she’s basically screwed.

All right, now, let’s look at a second issue associated with this particular life estate deed. Now let’s say the son had lived and now she passes away. Because she deeded the property to him in 2008, if he were to sell the property after she passes, he is looking at a massive capital gains tax. The basis for his ownership in this case was established in 2008. Now, if he takes the property in, let’s say, 2022, 14 years down the road, the tax basis for that property if he sells it now was set back in 2008. So whatever appreciation has happened to that house between 2008 and 2022, he is going be liable for capital gains tax on that property because he was not living there.

All right, so now here’s the real kicker. Rapid Home Deals can’t even buy this house, nor can the lady who’s living in the house who deeded the house to her heir because nobody has moved to probate his estate and he died intestate. So until somebody steps up and decides to probate this property, and they need to probate it before the foreclosure sale, well before the foreclosure sale, and it’s doubtful if that can happen because of the process that probate has to go through and where they are in the process of foreclosure, it’s going to be a very tight race. So this lady may find herself being foreclosed on and having to be moved out of her house because of the way that she wrote up this deed to deed the property to her heirs and give herself a life estate. Lesson learned here, always make sure your life estate gives you the power to control the property and leave it to your remainderman. That’s the way you usually see it written up instead of just deeding the property to your heir directly.

Okay. That’s it for this Friday. And we’ll see you again now next Friday, where we’ll answer more questions from sellers just like you. If you know anybody that’s looking to sell their house quickly has them call (352) 480-0955 or go to our website, www.rapidhomedeals.com, and we’ll see you next Friday.

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