Often confused with a living trust, life estate is actual joint ownership that enables the grantor to dictate that they (or another tenant) can maintain residence in a property as long as they live, while simultaneously transferring ownership over to heirs.
Why would someone do this? There are a few reasons, which I’ll outline later. But overall, people consider life estate when they want to confer future ownership of real estate but not give up their rights to occupy a property.
What is Life Estate
Life estate is a form of limited-duration joint ownership. It splits the bundle of rights so that one person has the right to possess and live in a property for as long as they’re alive, but when they die, ownership goes to a "remainderman" who has been the joint property owner all along. The remainderman does not have the right to possess the property while the life tenant is alive (unless the life tenant permits it), and the life tenant has only limited ownership rights.
The grantor of a life estate deed might do so for a few reasons:
- They may foresee arguments between the children who they want to inherit the property and the person currently living in it (i.e., a current spouse) and want to take care of both.
- They may want to avoid probate.
- They may want to reduce their asset ownership to avoid a Medicaid lien but still retain access to their home.
- They might want to create legally binding documents conferring ownership to heirs while continuing to live in the house even if the heirs don’t support it.
Because reasons for creating a life-estate situation differ and are highly personal, the terms of it can also vary. The grantor may grant life estate to a third party but usually confers it to him/herself. The grantor may also create a life estate where when the life tenant dies, ownership reverts to grantor and only to the remainderman upon the grantor’s death.
Questions about life estate answered
- Who pays the property tax? The life estate tenant does.
- Can there be more than one remainderman? Yes.
- Can a life estate deed be revoked? No.
- Does life estate override a living trust? Yes.
- Does probate override life estate? No.
- Who gets the property if the remainderman dies?
If the remainderman dies, the life estate transfers to his/her heirs.
Life estate versus living trust
A living trust is often described by lawyers as creating a "new person" who owns assets in the eyes of the IRS. This is confusing for trustees as well as the grantor of the trust. While a living trust is viewed as a legally airtight way of transferring assets without going through probate, it actually gets complicated if the grantor is still alive at such time as the trustee takes over. The trustee is in charge of the grantor’s properties, but the grantor may have no intention of vacating said property.
Life estate, on the other hand, creates joint ownership between two or three existing parties: the remainderman, who actually owns the property and will take control once the tenant dies, the grantor, and the person living in the home (often but not always the grantor), who is a tenant for as long as they live, but with fewer rights to the real estate.
Traditional versus enhanced
Traditional life estate typically requires remainderman and life tenant to agree if the life tenant wants to do anything besides occupy the property. Enhanced life estates grant much more control to a life tenant -- subject to state laws and the specific conditions of the life estate conveyance, of course. Only a handful of states allow enhanced life estate deeds, which are also known as Lady Bird Deeds (LBDs).
Additional rights that may come with an enhanced life-estate deed include:
- The right to take a mortgage on the property without consent from remainderman.
- The right to sell their interest in the property.
- The right to rent the property without remainderman’s consent.
- However, again, enhanced life estate is only recognized in a handful of states.
What responsibilities does a life tenant have?
- The life tenant is responsible for seeing to the upkeep of the property.
- The life tenant is also responsible for property taxes.
What are the disadvantages of life estate?
The disadvantages of life estate stem from the fact that it’s a long-term compromise over a large asset, and it’s very difficult to revoke or override. Most people go into setting up an estate plan with a certain idea of how they anticipate the future playing out and are trying to set up everything seamlessly for themselves and their heirs. However, when life throws curveballs, life estate can become awkward.
- The life tenant needs to move out, for example into a nursing home, but does not want the property rented out because they think they’re coming back. Control might pass to the remainderman, who wants to rent or sell it.
- The life tenant is incapable of maintaining the property but doesn’t realize it.
- The life tenant has a falling-out with the remainderman and wants to name different heirs.
- The grantor has a falling out with the life tenant and wants to move them out of the property before they die.
- The remainderman racks up debts and, subsequently, liens filed against the property while the life tenant still occupies it.
There are plenty of other potential situations, some of which can be anticipated and controlled by conditions in the deed, but definitely not all. In situations that can’t be solved by a condition in writing -- i.e., the life tenant fails to keep the property in good condition, because they no longer have the cognition to do so, but don’t realize it -- legal remedies are available but unpleasant. The remainderman may need to step in and ask the court for control of the property.
Can you have life estate and still qualify for Medicaid?
Actually, yes, and creating an enhanced life-estate deed is a loophole that can be used for elderly homeowners to avail themselves of Medicaid benefits, including nursing home stays if needed, and retain the right to own and control their home for five years longer
Traditional life-estate deeds require a five-year waiting period before Medicaid benefits kick in, so a person setting this up would be estate planning well in advance, with a less-than-optimistic view of their healthcare requirements 5 to 10 years down the line.
Note that with life estate property, if the home is sold while the life tenant is on Medicaid, the state may come after the life tenant’s share but not the remainderman’s.
With many potential benefits and potential for many resulting complications , life estate is a momentous and difficult-to-reverse decision that can be created with a simple written document. Its success hinges on whether all involved parties can continue to act in good faith and abide by the conditions.