A life estate is an interest in property that terminates upon the life estate holder’s death. Prior to their death, the life estate holder has the sole right to use the property (and benefit from income, if any). Upon their death, these rights transfer automatically to another party (the remainder beneficiary). Typically, the life estate holder is responsible for costs associated with maintaining the property (including property taxes).
How is a life estate created?
A life estate is created by deed, although its creation may be directed under someone’s estate planning documents.
An owner desiring to transfer full ownership of their property could transfer a life estate to one party and name another as the remainder beneficiary. For example, a husband may give his wife a life estate in his home and name his alma mater as the remainder beneficiary. Alternatively, an owner desiring to keep an interest in their property but ensure that, upon their death, it transfers automatically to another party could transfer the property to the remainder beneficiary but retain a life estate for themselves. Such conveyances should be recorded in the appropriate land records (i.e. – the clerk and recorder’s office).
Trusts are useful in establishing a similar framework, in which the property owner transfers ownership of the property to a trust and dictates, through the trust agreement, who has the right to use the property and under what terms.
What are the benefits of using a life estate?
At its very essence, a life estate framework allows one to split ownership rights. This is particularly useful when trying to balance the interests of various parties. With the example given above, the husband wants to make sure his wife has a home for the remainder of her days, but he also wants to ensure that his alma mater eventually receives his financial support. The life estate framework allows him to do both.
Life estates are also used in the context of Medicaid planning. Retaining only a life estate in one’s home may help them qualify for Medicaid, and transferring the remainder interest to another can protect the property from Medicaid recovery. Medicaid rules vary state-by-state – it’s essential use a Medicaid specialist/elder law attorney who is well versed in Medicaid law should you seek this planning.
What are the downsides of using a life estate?
The primary downside of the life estate is that both the life estate holder and the remainder beneficiary must consent to any transfer (or encumbrance). The property may also be susceptible to both the life estate holder and the remainder beneficiary’s creditors (after all, they both own a real, valid interest in the property).
When appropriate, we usually create life estates as part of an overall estate plan. You can schedule an estate planning consultation with attorney Gina Weinberger here.