At Elder Care Direction, we understand that there are different types of property ownership and property rights. One type of ownership can help to save on taxes and avoid probate while still giving you a place to live for as long as you are alive. This type of property ownership is called a life estate. If you are helping your elderly loved one with life planning, a life estate may be one way to handle the estate after your loved one dies.
What is a life estate?
A life estate is a type of property ownership for real estate. It is a jointly owned property that has different lengths of time during which each of the owners will have property rights.
The life tenant is the person who possesses the property while he or she is alive. When the life tenant passes away, the property will pass to the other owner in full. The other owner is known as the remainderman. During the life tenant’s life, the remainderman will own the property but will not have the right to possess it as long as the life tenant is still living.
After the life tenant dies, he or she will no longer be able to say how the property will be handled by the remainderman. The life tenant will not be able to restrict the remainderman’s use of the property through a will or by other means. The features of a life estate may either be helpful or might cause issues later on.
What are the responsibilities of the life tenant?
The life tenant must maintain the property while he or she is alive. He or she can also rent it out and improve it.
Probate is unnecessary for a life estate. When there is a life estate deed, the property will automatically pass to the remainderman when the life tenant dies. Probate will not be necessary to transfer the property. This makes it similar to a joint tenancy with the right of survivorship. Establishing a life estate is often simpler and cheaper than establishing a living trust.
Medicaid and life estates
There are strict rules that govern how much property you can own in order to take advantage of Medicaid. Many older adults rely on Medicaid when they have to move to nursing homes. Nursing homes are expensive and may cost thousands of dollars each month. In some cases, owning your own home or selling your home and keeping the money from the sale may disqualify you from eligibility for Medicaid.
If you instead transfer your home to a trusted loved one and keep a life estate a minimum of five years before you have to apply for Medicaid, the home will not be counted as one of your assets in determining your eligibility. In some cases, you may be able to purchase a life estate at its fair market value and live in the home for a year. If the right circumstances apply, you might still qualify for Medicaid benefits to pay for your nursing home care.
When does a life estate make sense?
There are several situations in which a life estate might make sense. If you want to transfer ownership of your home but keep your access to it while you are alive, a life estate can help you to do that. A life estate can also give you some reassurances about who will get your property after you die. It is also a good choice if you want an alternative to a living trust that is less expensive. A life estate might also help you to qualify for Medicaid and for senior tax exemptions. Finally, a life estate may allow your heirs to enjoy more beneficial treatment on their taxes.
Downsides to life estates
Before you decide to move forward with a life estate, there are some downsides that you should consider. Some of the drawbacks of life estates include the following:
- You will be unable to sell your life estate or use the property as collateral unless you have the permission of the remainderman and potentially the remainderman’s spouse;
- You might not be able to get financing on the property
- You won’t be able to reverse the life estate simply because you have decided that you want to;
- You must be able to cooperate with your remainderman;
- Your heirs’ creditors may be able to place liens against the property, but they will not be able to force you to move;
- If the property is sold, any liens against it may have to be repaid;
- A life estate may not protect you if your heirs divorce or file for bankruptcy protection; and
- If the remainderman dies before you do, the remainderman’s heirs will become your property’s remaindermen.
Learn more with Elder Care Direction
A life estate may be a good option in some situations. To learn more about life estates and whether it might be a good choice for you, contact Elder Care Direction by filling out our online form.