What is a Life Estate?
The life estate scheme divides ownership of a piece of real property between at least two parties—the Life Tenant and the Remainderman. The Life Tenant holds ownership and enjoys the use of the property for the duration of his or her life. The Life Tenant is responsible for the taxes, insurance, upkeep, and other expenses related to the property during his lifetime and has a duty to reasonably maintain the property while it is in his care. At the death of the Life Tenant, ownership of the property passes directly to the Remainderman (there may be one or multiple remaindermen), who then owns the property outright.
A life estate can be useful in estate planning, as it is one way to keep a real property from passing through the probate process. A life estate can also be used in Medicaid planning, but this is often a risky proposition. A life estate interest is often not included when figuring Medicaid assets, but it’s important to remember that there is a five-year look-back period on transfers of this type that can often trigger a penalty. There can also be tax implications associated with creating a life estate.
Other problems can arise in the context of a life tenancy. In a life estate, the Life Tenant and the Remainderman are technically co-owners, so no one person has complete control over the property. Conflict often starts when the Life Tenant fails to pay taxes on time or does not care for the property to the standards of the Remainderman. Selling the property can also become complicated, as each interest holder may only sell what he owns. In other words, the Life Tenant is only able to sell a life tenancy, and a Remainderman is only able to sell what will be his upon the death of the Life Tenant. All interest holders would be required to agree to and sign off on a sale of the property in order to transfer full ownership.
Creating a life estate can be easy, but dealing with one can be difficult. You should always consult an attorney to understand all of the pros and cons before executing a deed that creates a life estate.