Understanding Life Estates in Texas: A Comprehensive Guide

Key takeaways: 

• A life estate is a joint ownership arrangement where an original owner (the life tenant) retains the right to live on their property, while a new owner (the remainderman) will take over ownership upon the tenant’s death. 
• This can be an effective tool to avoid the probate process, as well as ensure a smooth transition of your property to the next generation. 
• In Texas, life tenants may also retain important tax benefits, like the homestead exemption. 

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If you’ve ever worried about how to pass down your operation or property to your kids, you need to know about life estates. 

Creating a life estate deed can look complicated on the surface. But it could lead to important tax benefits down the line and a smoother transition to the next generation.

How do life estates work in Texas? 

A life estate is a legal structure in which a homeowner can remain in their home and retain ownership until they pass away. When they die, the property is automatically passed on to the next designated owner. Think of this as temporary joint ownership, with succession plans proactively put in place. 

There are a couple roles within a life estate. There is: 

• The life tenant: the person who will remain in the home for the remainder of their lives.
• The grantor: the person who owns the property and is transitioning it to someone else (usually this is the same person as the life tenant). 
• The remainderman: the person who will take control of the property upon the death of the life tenant. 

Different types of life estate structures also exist. A granted life estate is typically within a will and involves one spouse becoming the life tenant after the death of the other spouse. The remaindermen (that couple’s children, for example) would take over the property after the death of the second spouse. 

A retained life estate is one that’s set up while the grantor (or life tenant) is still alive. 

Although you can put other types of assets into a life estate (like bonds or certificates of deposit), the most common asset is property (either land or a house). Depreciating assets (like cars or farm equipment) typically are not the best candidates for a life estate.

What is the point of a life estate? 

Without a life estate in place, properties could spend weeks, months, or even years locked in probate after the owner’s death. During a time that’s already full of stress and grief, probate only adds more strain (not to mention confusion). 

A life estate deed helps you and your family avoid the probate process. It sets up a clean, simple ownership transfer.

It’s also usually cheaper and less time consuming to create a life estate deed compared to other legal avenues. 

What are the downsides of a life estate? 

Life estates are usually pretty concrete, so make sure you’re certain about who is getting what when you set up the deed. It will be difficult to change these details (for example, who the remainderman is) down the road. 

Some tax implications are at play too. For example, if both the life tenant and remainderman decide to sell the property before the life tenant’s death, the remainderman might have to pay capital gains taxes. The rate of these will vary based on the total value of the property. 

There are also questions surrounding what happens if the life tenant does have to move away from the home before their death. For example, can a nursing home take a life estate? Technically, no. But the full answer is a little more complicated. If the life tenant goes to an extended care facility within five years of the deed’s creation, it’s possible Medicaid could put a lien on the property.  

The rights and responsibilities of those involved in a life estate

For all intents and purposes, the life tenant retains the benefits — and duties — of a property owner. They can still lease out part of the home and earn rent profits, if they want. They can also dictate how the property is used. This means the remainderman can’t live there without the life tenant’s permission. 

However, life tenants still keep all the expenses of home or property ownership too. For example, they still have to pay for property taxes, maintenance or repair costs, insurance, and utility bills. These would only be passed on to the remainderman once the life tenant passes away.

Life tenants also have the responsibility of maintaining the property so that it doesn’t depreciate in value before transferring over to the remainderman. 

Meanwhile, a remainderman has to pay the principal of the mortgage each month, while the life tenant is still responsible for the interest.

Texas is also unique compared to other states, in that it offers the homestead tax exemption. Since a life tenant would be living on the property, they retain the right to that exemption.

What is the difference between a living trust and a life estate? 

A living trust is another type of legal document that helps distribute a person’s assets after their death (or at specific designated times, like at a certain age or in case of incapacity). It also helps you to avoid the costly, drawn-out probate process. 

However, these are a bit different from life estates. A living trust usually involves a wider variety of assets beyond property: for example, bank accounts, stocks, or insurance policies. It also allows the grantor to maintain control over assets while they’re alive. A life estate, meanwhile, is a joint ownership agreement where that control is shared, and a grantor simply maintains the right to live there for the remainder of their life.

Can you sell a life estate in Texas? 

Typically in a life estate arrangement, the life tenant can’t sell the property or significantly reduce its future value (that value is owned by the remainderman). 

However, if the life tenant and remainderman both agree, they can sell the property rights together while the life tenant is still alive. This would leave the remainderman responsible for paying capital gains tax on the sale.

What are the IRS rules for a life estate?

Some remaindermen who receive life estate properties may have to file an estate tax return (Form 706) with the IRS. This will depend on the value of the property and whether it exceeds the filing threshold for the year of the life tenant’s death. 

For example, the current filing threshold is $13,990,000. You can find out more about potential federal tax implications by visiting the IRS’s page about estate taxes.

How to establish a life estate deed 

Starting the estate planning process early is vital. You don’t want to wait until you’re dealing with an illness, for example, to start making important decisions about succession. 

If you’ve decided that a life estate deed matches your specific needs, the process can be fairly straightforward. You’ll want to gather all the necessary paperwork, like property deed, property tax records, mortgage information, and the information of your intended remainderman. 

Then, you’ll want to work with an experienced real estate attorney to draw up the official life estate deed. After the attorney has written the document, you and the remainderman will need to sign, notarize the deed, and file with your specific county.

Get support from the experts 

Even if transfer of your operation to the next generation is years away, we’re still here to help in the interim. Whether you’re looking to refinance your land, purchase life insurance, or start construction on a new home your kids will one day live in, Texas Farm Credit offers the financial tools you need to maximize your investment and secure your future.