What is a Life Estate?
Many types of property rights exist as well as many forms of property ownership other than the common “fee simple” or joint ownership structures. A life estate is one of the forms of ownership, which can help you avoid probate, save on some types of taxes, and provide you a home that you live in till you die. It is a form of joint ownership in a piece of real estate.
What Is a Life Estate?
A life estate is a property which is owned by a person only through the duration of his or her lifetime. You cease to own a life estate when you die—you cannot leave it to your heirs. This form of property ownership is so restrictive that it prevents you from selling the property that gives you income before you die. If you have a life estate, it does not continue when you die.
A Breakdown of What a Life Estate is
A life estate is the vehicle by which the grantor or property owner transfers temporarily legal ownership of their property to another person (the beneficiary) until the death of the beneficiary. The beneficiary can also be referred to as a life tenant. The deed instructs that the property’s occupant has the rights to use it for the duration of his or her life. Most deeds that create a life estate usually name a remainderman. A remainderman is a person who is entitled to the property after the death of the life tenant. In most cases, the remainderman and the property owner are the same person.
In other words, even though the remainderman owns the property, they have no rights to the property until the death of the life tenant—unless the life tenant gives them express permission. Similarly, when the life tenant passes away, he or she has no rights to the property even if he or she attempted to restrict its use or ownership through a will or any other means during his or her lifetime.
Features of a Life Estate
Below are some fundamental features of a life estate and explanations of whether they are beneficial or would eventually cause problems.
The Responsibilities of the Life Tenant
The life tenant is responsible for property maintenance. Besides, he or she can improve it according to his or her taste. The life tenant also has the right to rent the property out.
Avoiding Probate
A life estate is one of the simplest solutions if you wish to avoid putting the property through probate. The life estate deed ensures that the property passes automatically (without probate) to the remainderman when the life tenant dies. Hence, there is no need for a probate court to initiate and effectuate the transfer. Therefore, in such a case life estate operates just like a joint tenancy with right of survivorship
It is worth noting that life estate is a simpler and more affordable alternative to a living trust if you want to avoid probate.
Life Estates and Medicaid
Medicaid has strict requirements regarding the assets that you can own and still qualify for the program. Medicaid is a lifeline for many senior citizens who want to move into a nursing facility, which is usually expensive for most people.
Notably, homeowners and those who keep the proceeds from the sale of a home may be disqualified from Medicaid eligibility.
However, transferring your property to a relative or trusted friend and retaining a life estate for not less than five years before you apply for Medicaid will prevent the house from counting against your assets while you are being assessed for Medicaid eligibility. Besides, there are some exceptions; for instance, if you purchase a life estate, under certain circumstances, and live on the property for one year, you may qualify for Medicaid.
When Should You Consider a Life Estate?
- If you believe you may need Medicaid when going into a nursing facility in the future, but you want to avoid the program’s liens on the property
- If you wish to transfer your property butt retain its access while you are still alive
- If you wish a specific person to get your property when you die
- If you want to make your property qualify for senior tax exemptions
Possible Drawbacks to a Life Estate
Although a life estate has numerous benefits, you should consider these possible downsides before you jump in:
- You must have permission from the remainderman before you can sell a life estate or use it as collateral.
- You may get limited financing on a life estate property.
- Your heirs’ creditors may place a lien against the property, which you may be forced to pay off if you sell the property.
- You must involve the remainderman if you want to reverse the life estate deed.
- A life estate offers you limited protections.
Getting Started
At times, it may be difficult to decide whether to buy a life estate. It is beneficial, but not in all circumstances. If you are planning or know someone who wishes to purchase a life estate, do not hesitate to contact The Mattar Firm to find out if a life estate is the best plan for you. Our estate planning attorneys are always ready to serve you.