A North Carolina resident who has a home to pass to beneficiaries might want to consider a life estate as an alternative to using a will or a trust to transfer the property. The advantage of a life estate over a will is that the home will not be tied up in probate while heirs must continue paying property tax and a mortgage. With a life estate, the property is transferred automatically to heirs on the owner's death.
However, there are some potential pitfalls. People who place their home in a life estate remains legally responsible for all payments associated with the home, but the remaindermen who are part of the life estate must agree before the home can be mortgaged or sold. Remaindermen cannot be removed without their permission. If a remainderman goes through bankruptcy or a divorce, their share of the home could be considered an asset. A life estate may also affect Medicaid eligibility and result in gift taxes for heirs.
Life estates work best in families where there is good communication and little conflict. If the owner and the heirs cannot work together effectively to find solutions, they may want to create a trust instead. A trust costs more but also does not have the disadvantages of probate or a life estate.
Trusts have a number of other uses as well, and people who are creating an estate plan might want to speak to an attorney about how trusts might fit into their estate planning goals. For example, a trust can help protect relatives with special needs by providing them with income that does not affect their government benefits. A trust may also manage assets for minor children or for a relative who is not responsible with money.