The Ultimate Guide to Life Estates

A life estate can be an effective and financially strategic way to pass your primary residence to loved ones after your death. This estate planning option allows older homeowners to transfer ownership of their property to adult children without going through probate court. With many young adults facing challenges entering the current real estate market, a life estate may offer a practical and timely solution.

In this article, we’ll explore how life estates work, including their advantages and potential drawbacks, with expert insights from Robert Walker, attorney and owner of Baystate Title and Escrow in Massachusetts.

What Is a Life Estate?

A life estate is a type of property deed in which multiple people share ownership but at different periods of time. It is an estate planning tool used to pass property from one party to another upon the death of the first party.

How Does a Life Estate Work?

Two parties participate in a life estate. The life tenant, who maintains ownership rights of the home during their lifetime, and the remaindermen, who take over full ownership upon the death of the life tenant. A typical life estate involves a parent as the life tenant and their adult children as the remaindermen, but it can be between unrelated individuals as well. “Most people use it as an estate planning tool,” Walker says.

During their lifetime, the life tenant has the right to live in and maintain control of their primary residence. They are also responsible for maintaining the property and paying any insurance, property taxes and utilities. Life tenants also have the right to rent the property. When the life tenant dies, full ownership is directly transferred to any remaindermen without the need to go through probate court proceedings. “It gives someone the right to have control of the property during their lifetime, then when they pass, the remaindermen take over,” Walker says.

However, selling or refinancing must be agreed to by all involved parties.

Who Owns the Property in a Life Estate?

Both life tenants and remaindermen own a life estate property, but technical ownership is divided between present interest and future, or remainder interest. In other words, both parties are listed on the deed, but only one party at a time has occupancy rights.

Life Estate Pros and Cons

Pros

• Avoid probate court: “A life estate is an efficient way to transfer property upon your death,” Walker says. “Probate court costs thousands and takes months.”
• Avoid Medicaid liens: If a life estate is created at least five years before a life tenant applies for Medicaid, the home is exempt from Medicaid liens to pay for care. “Life estates effectively shield a property from Medicaid claims,” Walker says.
• Lower capital gains taxes: When the property is transferred to the remaindermen, the home’s valuation is determined from the date of the life tenant’s death, not the date they purchased the house. This difference can mean paying significantly less capital gains tax on any property value appreciation.
• Peace of mind: Walker cites peace of mind on the part of the life tenant as a major motivator for entering into a life estate. “People like that they’re still in control of their property, but it goes to their kids right away when they pass,” he says.

Cons

• Remaindermen’s finances matter: If the remaindermen file for bankruptcy, go through a divorce or are sued, the property is considered one of their assets. “The bank can come get this house because it’s in their name and is listed as one of their assets,” Walker says.
• Possibly subject to gift tax: If the value of the home exceeds the annual gift amount, then remaindermen may be left paying a gift tax upon property transfer.
• Sales proceeds will be split: If the life tenant decides to sell their home, proceeds must be divided among the remainder. It is not a 50:50 split but is instead determined on a sliding scale based on the life tenant’s age and health.
• All parties must agree to a sale: With another party on the deed, the life tenant loses some autonomy over the property. This includes decisions to sell or refinance, which must be agreed upon by the remaindermen.

FAQ

Do you need permission from the remaindermen to do home improvement projects when you have a life estate?

Life tenants do not need to get permission from remaindermen to make home improvements. The exception would be if the project is funded using a home loan secured by the property, for which the remaindermen would have to agree and sign.

Do you need a lawyer to get a life estate?

Yes, you need a lawyer for a life estate. “You need someone who can draft and record a deed,” Walker says.

Can a life estate be foreclosed on?

Yes, if a life estate property has a mortgage securing it, it can be foreclosed on. “All parties have to be given notice,” Walker says. “Even though remaindermen may not live in the home, they must be notified because they are on the deed.”

Does a life estate override a will?

“Yes, a life estate does override a will as it pertains to property assets,” Walker says. If a will and life estate co-exist, the terms of the life estate supersede those of the will.

About the Expert

• Robert Walker is an attorney and owner of Baystate Title and Escrow PC in Easthampton, Massachusetts. He’s been an attorney for twenty years, and before that worked in the real estate and mortgage industry.