What is a life estate?
The term “life estate” refers to a form of property ownership among two or more people where the ownership interests are differentiated over time. One or more individuals maintain ownership only through the duration of their lifetimes. They own a “life estate” and are referred to as “life tenants.” Their interest is always for an indefinite period of time — the duration of their lives. The life tenant or tenants have the full right of possession, or right to occupy, the premises during their lives. In addition, they have the right to rent out the property and receive the income. They also have the obligation to maintain the property and to pay its expenses, including real estate taxes.
The life estate ends at the death of the life tenant (or at the death of the last survivor of the life tenants if there is more than one). At that point, the so-called “remaindermen” take over both full ownership and the right to occupy and control the property. Before this, even though they didn’t have the legal right to enter the property, they did have an ownership interest in it, which they can transfer or sell (assuming they could find a buyer).
The only significant power a life tenant does not have over property during their life is to sell or mortgage it on their own. For that, the remaindermen would have to agree and and sign off on the papers, since they have an ownership interest in the property. In the event of a sale, the remaindermen would receive a portion of the proceeds based on tables that factor in the life tenant’s age and current interest rates. As the life tenant gets older, her share becomes smaller, and the remainderman’s share grows larger.
Why would I want a life estate?
Probate Avoidance: A life estate provides a way of passing your home to your children or other beneficiaries without going through probate. If you own a home and the title is in your name alone at death, it will have to go through probate. Keep in mind that having a will does not avoid probate and simply tells the court how to distribute the property in your estate. A trust, however, avoids probate, as does property held in joint names with rights of survivorship or by spouses as tenants by the entirety.
Tax Planning: Also, retaining a life estate in your home means that it remains an asset of your estate for estate tax purposes and allows your children to receive what is known as a step-up in basis of the real estate. This means they inherit the property at the date of death value, not the value as of the date upon which you acquired the property. So, when your children sell the property, they should be able to avoid any tax capital gains, unless of course, the property appreciates to a value greater than the date of death value prior to the sale.
Protection for long-term care purposes: We often use life estates as a way to preserve the home for long-term care planning purposes. Without providing all of the details relative to the MassHealth rules, this type of transfer will trigger the five-year waiting period for eligibility. After the five-year transfer period, the property should be protected. In most states it will avoid any Medicaid estate recovery claim by avoiding probate. However, the Medicaid agency may place a lien may on the property to be paid back if the house is sold during the life tenant’s life, but only up to the value of the life estate and not the entire value of the property.
What are my responsibilities when I have a life estate?
When you are a life tenant, you are still responsible for paying the mortgage, property taxes and insurance, and making repairs to the property.
Are there any problems with life estates?
There are potential issues that may arise with life estates and it’s important to fully understand the following risks:
- As a life tenant, you may not easily sell or mortgage property with a life estate interest. The remainderman must all agree if you decide to sell or borrow against the property. In addition, if the property is sold, the remainderman could demand a share of the proceeds equal to what their interest is determined to be at that time.
- You cannot simply remove or change a name once it is on a deed to real estate like you can change the beneficiary on a life insurance policy or bank account.
- Once a remainderman is named on the deed to your house, he or she has an interest in the home and his or her 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. Your child’s interest in the home is not protected if he or she files bankruptcy. If your child gets a divorce, his or her 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. However, while these claims may be made against the property, no one can kick you out of it during your life.
- As touched upon above, giving away an interest in property could disqualify you from receiving assistance from MassHealth, should you require long-term care within the subsequent five years. 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, but the share of the proceeds allocated to your children would be protected.
As with most planning tools, a life estate can be very useful with valuable benefits, but it is not for everyone. In many cases, the potential problems outweigh the benefits. As the law in this area is complex, it’s important to talk to a lawyer who knows about this in-depth.