What is an Enhanced Life Estate Deed?
An Enhanced Life Estate Deed is a document that would deed a home to your children but reserve a life estate coupled with the ability to sell the property at any time. This is called an "Enhanced Life Estate." In layman's terms, this means that (1) you still own the property; (2) you can sell the property at any time without notifying her beneficiaries; and (3) if you never sell the property, the house will pass directly to your beneficiaries after you pass away without going through probate.
Florida, Texas, Ohio, California, Kansas and several other states now accept this form of conveyance. In these states it is a recommended alternative to the traditional life estate deed. Of course, where a life estate can result in unwanted capital gains taxation, it should not be used, and other forms of planning should be considered, such as a living trust.
Lady Bird Deed v. Quitclaim Deed
In the past, people have used a Quitclaim Deed in an attempt to avoid probate. The Quitclaim Deed was supposed to make things easier for beneficiaries. A Quitclaim Deed deeds property to one's children while the parent retains a life estate interest. The problem with the Quitclaim Deed is that you would not be able to sell or encumber or mortgage your property without the consent of her beneficiaries.
Further, creditors of your beneficiaries could obtain an enforceable lien against your home because the beneficiaries could not claim the home as homestead property. Also, spouses your beneficiaries could claim an interest in the property, either upon their husband's death or in the event of a divorce.
The Enhanced Life Estate Deed does not share the above pitfalls.
The Enhanced Life Estate Deed has several other benefits including:
(1) bypassing probate;
(2) it does not result in capital gains for the beneficiaries because they will not receive any value until you pass away. When you pass away, your beneficiaries take the home at a "stepped-up basis" - not your original basis. A "stepped-up" basis is the value of the property on the day of your death;
(3) it does not open up the property to the beneficiaries' creditors during your lifetime because the beneficiaries have no interest until you have passed away without selling the home;
(4) it allows you to sell your home at any time, compared to a regular life estate where you would not be legally entitled to sell your home.
Attorney's Title Insurance Fund has recognized certain specific language that must be included to validate an Enhanced Life Estate Deed. Without the specific language the deed will be declared invalid for transferring the real estate in the manner outlined above.