Life Estates: What You Need to Know

The term “life estate” often comes up in discussions of estate planning and Medicaid planning,
but what exactly does it mean? A life estate is a form of joint ownership that allows one
person (or a couple) to remain in a house until his/her/their death, at which time it passes to the
successor (often a child), referred to as the “remainderman”. Life estates can be used to
avoid probate while simultaneously giving a house to children without losing the ability to live in
the home during the owner’s lifetime. The person(s) holding the life estate remains responsible
for property tax (with the benefit of homestead and age related tax exemptions) and
homeowner’s insurance. The other owner — the remainderman — has a current ownership
interest but cannot take possession until the death of the life estate holder.

The life tenant has full control of the property during his or her lifetime and has the legal
responsibility to maintain the property as well as the right to use it, rent it out, and make
improvements to it. This type of deed can play an important role in Medicaid planning since
Medicaid does not assign any value to a life estate when the parent applies for Medicaid to pay
for nursing home care.

A life estate deed can be a great tool for passing property after death.  The remainderman will
have a stepped up tax basis in the property which is the fair market value on the date of death of
the last life tenant.  An additional benefit is the fact that Medicaid will not count the life estate as
a resource if the life estate deed was executed five years prior to Medicaid application, and the
property would not be subject to Medicaid Estate Recovery since it will never be probate
property.

All of these are huge benefits to executing a life estate deed, however, there are some setbacks
that you should be aware of. If the person or couple holding the life estate decides to sell the
property they will need the children to agree on the sale because the children are now joint
owners with the parents.  The parents own use of the property NOW, and the children, as
remaindermen, own the FUTURE use of the property. With this in mind, before signing a life
estate deed it is important to make sure the remaindermen would be willing to relinquish their
interest and sign off on any sale of the property.