One very important part of planning for the future is determining what will happen to your assets, such as your home, after you die. Depending on whom you plan to name as your beneficiaries and the type of property you plan to pass on, a life estate might be a key tool in that process.
Life Estate: A Definition
One method of legally establishing your ownership rights — while also offering tax advantages and a simplified process after you pass away — is to create a life estate.
A life estate deed is a legal contract that can be drawn up by an attorney to create a sort of joint ownership. As the owner of the property (and life tenant), you would retain control and (if desired) tenancy through the end of your life. Once you pass away, however, the property will automatically transfer to the individual or entity of your choosing.
Unlike your other assets, property held in a life estate can be transferred without needing to pass through probate. This saves both time and potential frustration and can also result in significant tax advantages.
The Life Tenant And The Remainderman
The owner of the property in question is considered the life tenant, or grantor, when it comes to a life estate. As the life tenant, you will legally maintain possession of that property until you pass away (if that’s what you would like to do), even though you are technically passing on ownership of the property to your beneficiaries ahead of your death.
This means that if you are creating a life estate deed for your primary home, you can securely live out the rest of your life there while also ensuring that it will transfer seamlessly to your chosen beneficiary once you’re gone.
The beneficiary you elect for your life estate is called the future tenant, or remainderman. They hold no rights to possession of the property while you are still alive; once you pass away, though, they will take full ownership and be able to make any and all decisions about the property.
Since a life estate deed is a form of joint ownership, both parties have an interest in the property and its care. The life tenant is able to make improvements to the property, renovate, or even turn it into a rental in many cases. However, they are also obligated to maintain its upkeep.
A life tenant is not allowed to sell a property outright, though they can sell their life interest in the property with the remainderman’s consent. However, it’s important to note that the buyer would only hold ownership of the property until the life tenant passes away; at that time, ownership would still transfer to the remainderman, in accordance with the life estate deed.
Life Tenants And Medicaid Eligibility
Medicaid can play an essential role in many older adults’ lives, providing them with the financial support needed for things like nursing facilities and home health care. However, one’s assets are considered as a factor for Medicaid eligibility, which means that owning a home – or selling it outright and keeping the proceeds – could impact those benefits.
Setting up a life estate can circumvent this issue, with a few caveats.
Since a life estate deed effectively transfers ownership of your property to another person (even if you maintain residency there), one can still qualify for Medicaid benefits without needing to sell their property first.
Many states have a 5-year “look-back period,” which requires your social services department to calculate applicants’ assets, and to investigate whether any assets have been sold or transferred in the recent past. As long as your life estate deed was established before that date (calculated from when you first apply for benefits), the homeownership transfer will not count against you for Medicaid eligibility purposes.
Pros And Cons Of Life Estates
Here are a few reasons you may, or may not, want to consider establishing a life estate.
There are many pros to life estate deeds. They include things like:
- Your property doesn’t have to pass through probate. Property held in a life estate does not have to go through the probate process. It simply transfers ownership to the remainderman, saving everyone time and headaches.
- It can simplify the estate planning process. Rather than spelling out your intentions for a specific property in your will, a life estate can simplify everything by bypassing the typical estate, will, and inheritance process.
- You can pass on ownership while still guaranteeing yourself a place to live for the rest of your life. Even though a life estate effectively transfers ownership of a property to the remainderman, you (as the life tenant) are guaranteed residency, if desired, until your death.
- You can ensure that your property goes to whom it’s intended. Whether you’re concerned about your heirs fighting over property or just want to ensure a seamless ownership transition, a life estate clears up the process.
- After a specific time period, it can help with Medicaid eligibility. Each state has its own Medicaid look-back period but once this has passed, a property transferred through a life estate will not count against eligibility.
There are a few reasons why a life estate might not be the right call, of course. These include:
- You are still responsible for expenses on the property. Property taxes, maintenance, mortgage liens, insurance … even though you’ve effectively transferred ownership of your home (or other property) with a life estate, you’re still responsible for its various expenses until you pass away.
- The remainderman now has a say in your property. If you want to significantly alter your property, rent it out, or even decide to sell, you’ll need your remainderman’s permission.
- You are responsible for its upkeep and maintaining its value. Since they have a vested interest in the property, your remainderman can also step in to ensure that you’re maintaining the property (and its value) to a reasonable standard.
- Life estates are difficult to revoke. Whether there are disputes, or you simply change your mind about leaving your property to a particular remainderman, a life estate can be incredibly difficult to reverse. It typically requires both parties to agree to the change and can be a tricky legal situation.
- There may still be tax consequences for the beneficiary. While a life estate bypasses probate, it doesn’t mean that there won’t be tax implications for the beneficiary. Depending on the situation and even the rest of your estate, they could be subject to gift taxes or estate taxes.
The Bottom Line
A life estate can be a very helpful financial planning tool, especially if you’re looking for a way to simplify property transfer upon your death. While the life estate deed effectively transfers ownership of a property, such as your home, it also guarantees that you have somewhere to live out the rest of your life and can even free up eligibility for important funding from programs like Medicaid.
Of course, a life estate isn’t for everyone and shouldn’t be entered into lightly. But if you’re sure about your plans for your estate and want to start that process before you pass away, it’s at least worth considering.
To learn more about helpful estate-planning tools and strategies, including life estate deeds, check out the resources in the Quicken Loans® Learning Center.