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 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 is a real estate property, often residential, where the original owner can remain living in the home until their time of death.
After their death, their successor will inherit the property while avoiding probate. Life estates are often used to simplify the estate planning process so that a home can be easily passed down to the next generation after a family member has passed on.
There are two parties involved in a life estate:
- Life tenant. This is the life estate holder that lives in the property until they pass on.
- Remainderman. This is the individual who will be the full ownership beneficiary of the property once the life tenant passes away.
How Does A Life Estate Deed Work?
A life estate deed is a legal contract that can be drawn up by a real estate 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 passed away, though, the property would 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 it can also result in significant tax advantages.
Who Owns The Property In A Life Estate?
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’ll legally maintain possession of that property until you pass away, even though you’re technically passing on ownership of the property to your beneficiaries ahead of your death.
This means that if you’re 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 beneficiary once you’re gone.
The remainderman holds no rights to possession of the property while you’re still alive. Once you die, they’ll take full ownership and be able to make 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 can make improvements to the property, renovate it or even turn it into a rental in many cases. They’re 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. 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 Estate And Medicaid
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. If 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 things to consider before establishing a life estate.
There are many pros to life estate deeds. Here are some of the most common:
- 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, 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’re still responsible for expenses on the property. These include property taxes, maintenance, mortgage liens and insurance. Even though you’ve effectively transferred ownership of your home (or other property) with a life estate, you’re still responsible for its expenses until you pass away.
- The remainderman now has a say in your property. If you want to significantly alter your property, convert it into a rental or even decide to sell, you’ll need your remainderman’s permission.
- You’re responsible for the property’s 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 change your mind about leaving your property to a particular remainderman, a life estate can be incredibly difficult to reverse. It 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, there could still 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: Is A Life Estate Right For You?
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. 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 it 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.