What’s the Difference Between Life Estate and Transfer on Death Deeds?

 A life estate deed and a transfer on death deed seem to accomplish the same goal at first glance. They both fully convey property to a Grantee upon your death. However, there are key distinctions between the two and your particular situation helps determine which is right for you. 

What's the Difference Between Life Estate and Transfer on Death Deeds?

Life Estate Deed

A life estate deed allows you to transfer property while reserving an interest during your lifetime or during the lifetime of someone else. Once the person who holds the life estate passes away, the Grantee fully owns the property. 

With a life estate deed, both the Grantor and the Grantee own an interest in the property as soon as the deed is signed. The Grantor owns a life estate and can be referred to as the “life estate owner.” The Grantee owns a future or remainder interest and is called the “remainderperson.” 

Either the life estate owner or remainderperson can convey away or sell their share of the property at any time. Specific value tables help determine the value of both interests based on the life estate owner’s age. However, a life estate deed is irrevocable—this means that if you convey your property to your children and reserve a life estate to yourself, you can’t change your mind and take it back. Ownership can be made whole again if either the life estate owner or the remainderperson choose to convey their interest to the other party. 

One advantage of the life estate deed is that it starts the clock on five year look back periods for things such as Medicaid eligibility. Some disadvantages are its irrevocability, as previously stated, and that it can open the property to creditors of the remainderperson. 

Transfer on Death Deed

A transfer on death deed allows you to retain full ownership during your lifetime and conveys your full interest to the Grantee upon your death. During your lifetime, the Grantee has no interest in the property. 

The main advantage of the transfer on death deed is that it is very flexible—it can be revoked at any time unlike the life estate deed. However, because the property fully remains within your control, a transfer on death deed does not start the clock on the five year period and so the property would still be counted among your assets for Medicaid eligibility. 

Ultimately, the decision between a life estate and transfer on death deed is dependent on why you want to transfer the property. If you simply want to avoid probate while still having full control over your property, a transfer on death deed might be the best choice. If you’re concerned that you may have to apply for Medicaid in the relatively near future, a life estate deed might be a better option. In any case, a conversation with an estate planning attorney can help you make the right choice for your situation.