Living Trust vs Life Estate: What’s the difference?

When you need to pass down your valuable assets to selected beneficiaries, you can choose between living trusts and life estate deeds. Both options have their own set of perks and cons. The good news is that both options allow you to avoid probate.

The focus of this post is to help you understand the basic differences between a living trust and a life estate. It will help you determine which option is more suitable for you or your loved one. Now, let’s look at the unique differences between the two:

What is Living Trust?

A living trust refers to a legal arrangement set in motion by the grantor to protect assets and ensure proper distribution of assets after the grantor’s departure. At its core, a living trust is a tool of estate planning that makes it possible for beneficiaries and family members to avoid the complex, public, complex, and lengthy probate process.

Technically, it is a legal document that outlines the terms and conditions of the trust and respective assets assigned by the grantor. The grantor designates a trustee who gets to control the assigned assets in the best interests of the beneficiaries.

Benefits of Living Trust 

  • It allows you to avoid the court-supervised probate process.
  • While it depends on the assets and estate involved, probate usually becomes expensive and lengthy.
  • But when you can avoid probate expenses after your death, you can save money.
  • When someone contests the distribution of assets, a living trust validates even better than a will and helps the estate save money.
  • Living trusts facilitate in case of incapacitation and protect your privacy.

Drawbacks of Living Trust

  • One of the pitfalls of a living trust is that it involves a lot of paperwork. Setting up a new living trust is a tiring and expensive process.
  • Creating a trust also involves signing it in the presence of a notary public. Mostly, drafting a living trust is not so different than a will.
  • It is only effective when you ensure that the ownership of a listed property in the document gets legally transferred. But this requires continuous record keeping that often overwhelms trustees.
  • In fact, you have to keep legal records every time there is a transfer of a property. In some states, when you transfer property, it comes with a tax.
  • It can be challenging to refinance trust property. In a living trust, you cannot eliminate creditors’ claims.

What is the Life Estate Deed

A life estate is a kind of deed that allows you to transfer property to your loved ones in case of your demise. Your properties are automatically transferred to your loved ones in an estate deed.

You can pair your will with a life estate deed to cover most options. A life tenant drafts an estate deed. In an estate deed, the real estate property is yours while you’re alive. With a life estate in place, no one can evict beneficiaries from the house after your death. 

Benefits of Life Estates

  • When transferring real estate properties, a life estate deed has several benefits and fewer limitations. To some degree, it is a better instrument to transfer property than many tools.
  • Like a living trust, an estate deed allows you to avoid the extensive, expensive, and complex probate process. 
  • One of the benefits of a life estate is that it cuts out the need to have a will. So, having a life estate deed means you don’t have to cover the property in your will.
  • In terms of tax benefits, life estates do not trigger taxes and ensure cost-effective transfer of property to loved ones.
  • In an estate deed, there is no risk for estate recovery processes.

 Life Estate Owner

Life estate secures property ownership and provides property tax exemptions for years to come without requiring the property owner to leave the estate.

Drawbacks of Life Estate

Before you create a life estate document for your property, it is crucial to be aware of the potential downsides and pitfalls of a life estate vs. a living trust:

  • Life estate deed does not allow making any changes. In fact, an estate deed is difficult to reverse. Since overturning is tough, establish whether or not you want to create a life estate deed from the start.
  • An estate deed can adversely impact financing.
  • Capital gains and sale proceeds of a life estate can be complicated
  • Instead of tax benefits, an estate deed may propel you to cover federal gift taxes.
  • An estate deed does not provide enough control to the property owner.
  • The owner is vulnerable to transferred debts for the foreseeable future.

Difference between Living Trust and Life Estate

The truth is that a life estate deed and a living trust can substitute for each other. However, there are some differences that make each instrument unique. In retrospect, a life estate involves property ownership that lasts throughout a person’s life.

On the other hand, an estate deed transfers property ownership while the owner is still alive. There is more than one complexity that can stem from a life estate deed. For instance, the property owner may not be able to change or sell a property.

Similarly, the owner of an estate may not be able to use the property to get some money. Also, if the owner passes away, the true property owner gets it back, and the estate deed does not automatically pass the property to ex spouse or children.

Now, a living trust is an individualized legal document where a trustee becomes responsible for managing the assets and work in the best interests of the beneficiaries. The usual course is to sell the living trust property requiring verification and signed authorization. In the event of a beneficiary or trustee’s death, a successor is named within the trust.

Final thoughts

It is vital to remember that a living trust and a life estate deed are integral documents in estate planning. Fundamentally, an estate divides the ownership between the receiver and the giver. A living trust makes it possible to transfer a portion of an asset.

There are many reasons to leverage an estate deed and a living trust to transfer assets and avoid the probate process. All in all, an estate deed requires more considerations before signing. Ideally, you should have an estate attorney advertising to draft the legal document and learn how to utilize this legal instrument best.

Notarize your living trust or life estate deed easily via PandaDoc Notary.

FAQs

Who owns the property in a life estate?

The individual with an estate deed gets the legal right to use and possess the property throughout his lifetime. After the life-tenant’s death, the property is transferred to the individual who has the remaining interest. 

Can a living trust be a beneficiary?

Yes, a trustee can act as a trust beneficiary. Today, a revocable trust has become a standard trust.

Should you use a living trust or a life estate?

If your home is part of the trust, it won’t be easy to sell it. Instead, the trust allows heirs to get the funds after a settlement. In comparison, an estate deed is an ideal option. Owners can sell or manage the property during their lifetime.

Why is a living trust better than a life estate plan?

The main benefit of a living trust is that it helps you avoid the traditional court proceedings of probate once you depart. 

What type of living trust is best?

Revocable trusts and irrevocable trusts are the most practical and utilized trusts. Similarly, you can also use irrevocable trust, life insurance trust, and credit shelter trust.

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