A life estate is an estate planning tactic that allows real estate to bypass the public process of probate. Essentially, the real estate is gifted directly to a “remainderman” after the “life tenant” dies. Life estates often work out well, but it’s wise to understand the unintended consequences that can arise.
Estate Planning Priorities
Ultimately, any estate planning tactic is only as good as its alignment to the particular needs and circumstances of the family creating it. Clarity about your intentions–both what you want and what you want to avoid–is essential to creating a “good” estate plan, and that’s why expert advice can be very valuable. That said, life estates do offer a relatively easy way to gift real estate, such as the family home, to a loved one: “In a life estate, two or more people each have an ownership interest in a property, but for different periods. The person holding the life estate – the life tenant – possesses the property during their life. The other owner – the remainderman – has a current ownership interest. Yet they cannot take possession until the death of the life estate holder.” Clearly, the benefits of life estates are many:
The life tenant has full control of the property during their lifetime. They also have the legal responsibility to maintain the property and the right to use it, rent it out, and make improvements to it. Life estate deeds permit parents to pass ownership of their homes to their children while retaining absolute possession of the property during their lives. By executing a life estate deed, the property would avoid probate at the parents’ deaths.
Despite the relative ease of setting up life estates, however, they are not for everyone. Unforeseen circumstances can present challenges. Potential downsides of life estates include limited ability to sell or mortgage the property, as well as difficulty removing a remainderman once added to the deed:
As a life tenant, you may not easily sell or mortgage property with a life estate interest. The remaindermen must all agree if you decide you want to sell or borrow against the property. If the property is sold, the remaindermen are entitled to a share of the proceeds equal to what their interest is determined to be at that time.
It is not as easy to remove or change a name once it is on a deed to real estate as it is to change the beneficiary on a life insurance policy or bank account. Once a remainderman is named on the deed to your house, they have an interest in the home, and their legal problems could become yours. For example, if your child, who is a remainderman, is sued or owes taxes, a lien could be filed against your home.
Caregiving Needs?
Life estates can also pose complications if Medicaid eligibility becomes a factor: longer lives are making caregiving services essential for many older adults, and services can be hard to pay for. Although public assistance like Medicaid is a possibility, qualifying can be difficult and time sensitive:
A life estate deed… protects the property from a Medicaid lien…but this strategy only works if the transfer is outside of the Medicaid lookback period….Giving away an interest in property could disqualify you from receiving assistance from Medicaid should you require long-term care within five years of the transfer. Often life estate deeds are signed without any thought about the need for Medicaid, and these deeds can practically be difficult to reverse, especially when a remainderman dies or has an uncooperative spouse. In addition, if you and the remaindermen were to sell the property while you were in a nursing home, the state could have a claim against your share of the proceeds for payments it has made on your behalf.
There are other unforeseen events to consider related to life estates, given the twists and turns of family life. For example, if the remainderman files for bankruptcy, the home is not protected, and similarly: “If your child gets a divorce, their spouse could claim all or part of your child’s interest in your home. Should your child die before you do, the child’s estate would have to go through probate unless at least one other remainderman was listed as a joint tenant. Note that while these claims may be made against the property, no one can kick you out of it during your life.”
Comprehensive Estate Planning
Before establishing a life estate, it’s wise to get advice from an experienced estate planning attorney, who can help you think through your goals, and the overall estate planning tools, like wills and trusts, that best address your needs. Importantly, during estate planning, in addition to proactively planning for the future of the family home and other important assets, you will designate a loved one, friend or professional to serve as the fiduciary who will carry out your arrangements. Be sure your designee understands your plans, and has the detailed information needed to attend to them. Depending on your circumstances and region, your fiduciary may be specifically referred to as an executor, trustee, or personal representative.
Regardless of the details of your estate plan, any fiduciary you appoint has a legal responsibility to carry out your affairs in accordance with the intentions set forth in your plan–and the law. When representatives are designated, fiduciary bonds, alternatively referred to as estate bonds are commonly required, and serve as a safeguard for beneficiaries. Learn more about estate bonds right here.
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