Set up a Life Estate

A life estate is a co-interest in property, which allows the party owning the life estate, known as the life tenant, to use and enjoy the property for his or her lifetime. The interest of the life tenant terminates immediately upon his or her death, and ownership transfers to the “remainderman” named in the deed or will. Life estates are most commonly set up as estate planning tools in order to avoid probate or Medicaid planning tools in order to protect an elderly Medicaid patient’s home.

Steps

Considering the Benefits and Drawbacks of a Life Estate

1. Understand the purpose of a life estate. A life estate usually refers to a transaction related to property, such as a home, where the homeowner sells or gives the property to their children (or someone else) but maintains the right to live in the house until they die.
   • The person who sells their home but maintains a life interest is referred to as the “life tenant.”
   • The person(s) who will receive the house upon the death of the life tenant is called the "remainderman."
2. Examine the benefits of a life estate. There are several reasons why a person may create a life estate. These include:
   • The homeowner wants to avoid probate for their children. By creating a life estate, the property avoids probate and the remainderman immediately becomes the owner of the property upon the life tenant’s death.
   • The property receives a step-up in basis. This means that when the government calculates capital gains taxes, value is calculated from the date of death, not from the date the original party acquired the property. Typically, there will be a greater increase in value from the date the property was acquired and therefore the tax owed on a property when sold would be much higher. By establishing a life estate, a parent could significantly reduce the amount of capital gains that a child has to pay.
   • A life estate may also be useful to qualify for medical assistance such as Medicaid, which limits the amount of assets you can own if you want support to pay a nursing home. The legal rules involving Medicaid are very complicated and you should contact a trust and estates attorney or an elder law attorney to assist you in making this determination.
3. Consider the drawbacks of a life estate. Before entering into a life estate, it is important for you to understand and weigh the drawbacks of a life estate against any potential benefits. These drawbacks may include:
   • Selling property subject to a life estate is very difficult. While you maintain the right to live in the home, when you enter a life estate, you give up your right to sell or mortgage your home without the consent of all remaindermen. If the remaindermen refuse to agree to a sale, you are unable to sell the property.
   • A remainderman’s legal problems could impact the property. Since the remainderman has a legal interest in the property, if they run into financial trouble, a lien could be placed on the property while the life tenant is still alive. While the claims may impact the property, a life tenant cannot be forced to leave the property.
   • A life estate may impact your ability to receive medical assistance to pay for nursing home care or in-home care. If you grant a life estate, you may be restricted or ineligible from receiving government assistance through Medicaid for up to five years.

Drafting a Life Estate

1. Hire an attorney. States have different rules related to life estates and there are complicated implications, such as potential Medicaid ineligibility, which may significantly impact you. If you are considering entering into a life estate, speak with an attorney so that you understand all of the risks as well as benefits. You can locate attorneys in a number of ways, including:
   • Referral from friend or family member. If someone you know used a trust and estates or elder law attorney, you can ask them whether they would recommend that attorney. A recommendation from a trusted person who has personal experience with an attorney is a good place to start.
   • Local or state legal bar associations. Local and state bar associations often provide referral services to attorneys in your area. Through state bar associations, you can check whether any complaints were filed against your prospective attorney. The American Bar Association has compiled a list of state-by-state resources that can direct you to attorney referral sites, such as contact information for state bar associations. The ABA provides this information at http://apps.americanbar.org/legalservices/findlegalhelp/home.cfm
2. Draft a life estate deed. Each state may have different requirements for a life estate to be valid. You should review your state’s law by locating your state’s legal codes and searching for the phrase “life estate.” You can find links to state codes here:http://www.findlaw.com/11stategov/indexcode.html. Generally, life estate deeds will require the following:
   • The date the deed was made;
   • The name of the party granting the life estate and their address;
   • The name of the grantee and their address;
   • The address and a legal description of the property that is subject to the life estate;
   • A statement expressly reserving the life estate; For example, the statement could read “EXPRESSLY RESERVING Life Estate in the above described property unto the Grantor and its assigns. The Grantor shall have full ownership, possession and use of the property, as well as the rents, revenues and profits generated by the property during the term of the Grantor's natural life.”
   • The signatures of both/all parties, and the document should be notarized.
3. Create a Life Estate by Will. You can also create a life estate by will, which means you grant a part a life interest in your property once you are deceased. For example, you are remarried but you ultimately want the property to go to your children, not the relatives of your new spouse. You can grant your spouse a life estate in the property and upon the spouse’s death, the property would pass directly to your children.
   • Your will must clearly state that the property goes to one party for the rest of their life then is transferred to another when the first beneficiary dies. This should create a life estate.
   • You should speak with an attorney to make sure that the will and the life estate language meets your state’s legal requirements for a life estate.
4. Record your life estate by deed. If you created a life estate by deed, you must record the deed in order for it to be valid. You need to locate the place where deeds are recorded in town or city where the property is located, typically at a county recorders office.
   • Conduct an internet search for the name of your town or city and “record a deed.” This search should provide you the contact information for the county office.
   • Call the deed recorders office and ask what steps you need to take to properly record a life estate deed.

Understanding Your Obligations and Rights under a Life Estate

1. Maintain the Property. While the life tenant has exclusive use of the property during his or her lifetime, the life tenant also has obligations under the life estate. The most basic obligation is to maintain the property. Generally, the life tenant must:
   • Make necessary repairs to the home;
   • Maintain insurance for the property;
   • Pay all real estate taxes; and
   • Make mortgage payments.
2. Collect profits from the property. The life tenant has the right to all income and profits generated by the property. If the life tenant rents the property, the life tenant is entitled to collect the rent and profits.
3. Sell his or his interest. Unlike a life tenant who cannot sell the property or the remainder interest, the remainderman may be allowed to sell his or her remainder interest in the property even before the life estate terminates.
   • Generally, the ability to sell a remainder interest during the term of life interest needs to be set forth in the legal document establishing the life estate.
   • Remaindermen can also sell the property with the permission of the life tenant.

Warnings

• You should consult with an attorney and/or tax professional before deeding property to anyone for estate planning or Medicaid purposes. There may be legal and/or tax consequences of which you are not aware.

Related Articles

• Determine when Estate Tax Is Due

Sources and Citations

See also

• Choose a Home Inspection Company
• Find a Property Appraiser
• Challenge an Appraisal
• Read a Land Survey
• Save Your Home from Foreclosure
• Deal With Squatters in Your Neighborhood
• Rehab a Property in the Proper Order
• Fight Foreclosure
• Select a Realtor
• Buy a House

Read more ...

What links here

• Avoid Paying Gift Tax
• Protect Assets From Nursing Home Expenses