Borrowing Against a Life Estate in a House

Borrowing Against a Life Estate in a House

We granted a life estate trust to my husband's step mother. The purpose was to allow her to live in the house until her death. She wants to borrow money against the house. Can she do that? Would it become a charge against us [the remainder beneficiaries]? Would we be responsible if she defaulted on the loan?


Your question mixes two concepts: trust and life estate. While they are similarities there are important differences. A trust is generally created under a will (testamentary trust) or under a trust agreement (contract) created during life (an inter-vivos trust) or under a deed. If the "life estate" in the house were created under a trust (i.e., a trust that gave her the right to live in the house for her life) then the issue as to whether the house could be mortgaged would depend on the terms of the trust contract (the governing document, trust agreement). If here lifetime rights to use the house was under a trust then it would not be your husband's step mother's right to borrow against the house, but the trustees. If in the alternative, the life estate was created under a deed then you have to look at the terms of the deed to see if she has the right to borrow against the house. Most deeds used to create life estates are quite simplistic and don't get into that level of detail. If the deed is silent then you have to research state law to determine if she has the right to borrow against the house. While it is unlikely the only way to determine this accurately is to have a local real estate attorney review state law and the deed. If she is permitted to borrow against the house if the loan is not repaid it would indirectly harm you economically in that it would reduce the value of the house. Even if she, as the life tenant, is obligated to repay the loan, if she doesn't what recourse would you have. If she endeavored to borrow against the house the lender would presumably review the deed (title, ownership) to the house to determine her interests. Likely the lender would review these issues as well.

You should search other Q&As on this website that discuss life estates.

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