A life estate is property, usually a residence, that an individual owns and may use for the duration of their lifetime. This person, called the life tenant, shares ownership of the property with another person or persons, who will automatically receive the title to the property upon the death of the life tenant.

In the U.S., life estates are most often created by homeowners to ensure that the next generation eventually gets the family home while avoiding probate, the legal process of proving a will.

A life estate is a type of joint property ownership.
Under a life estate, the owners have the right to use the property for life.
Typically, the life estate process is adopted to streamline inheritance while avoiding probate.
The life tenant retains all the rights and responsibilities of an owner except the right to sell or mortgage the property.

A life estate is a form of joint homeownership. Ownership is shared between a life tenant and a so-called “remainderman.” As the name suggests, the remainderman has an ownership interest but cannot take possession until the death of the life tenant. The life tenant may live in the home but may not sell it or mortgage it without the agreement of the remainderman.

The life estate is established with a deed that states that the occupant(s) of the property is allowed to use it for the duration of their lives. The deed will also name the person who will receive the property after the death of the life tenant.

In the U.S., the creation of a life estate is usually a part of estate planning. However, depending on the country, it can serve other purposes. For example, in France, a homebuyer can arrange a life tenancy with an elderly homeowner and pay that person a regular income in return for being named as the designated remainderman. The process functions as a private reverse mortgage–a practice that dates back to the 9th century.

Within a life estate, the life estate deed is a document that grants the owner the ability to pass on ownership of a property without including it in a will as part of a person’s assets. As a result, the property does not have to go through probate, the court process that is used to validate wills. When the estate is very substantial or unusually complex, the probate process can be costly and complicated.

If there is a life estate, the life tenant’s interest in the property ends at death, and ownership is transferred to the remainderman. The life tenant is the owner of the property for life and is responsible for costs such as property taxes, insurance, and maintenance. Additionally, the life tenant also retains any tax benefits of homeownership.

While a life estate is usually created to streamline the process of transferring homeownership to the next generation, it can also be used to establish an income stream.

Life estates can be created to provide a life-long income for a person rather than a lump-sum inheritance. In this case, the estate consists of a sum of money invested in income-producing instruments, such as bonds, oil and gas leases, real estate investment trusts (REITs), and other similar investments. Under this arrangement, the life tenant receives income for life, but they cannot access the principal amount.

No matter what type of property is involved in a life estate, the life tenant cannot sell it or borrow money against it without the agreement of the remainderman. If both agree to the sale, the remainderman could demand a portion of the proceeds based on a predetermined scale that reflects the life tenant’s age, as well as current interest rates. Typically, the older the life tenant, the greater the share that the remainderman can expect to receive.

Under a life estate, the home is no longer an asset of the individual’s estate. That shields it from lawsuits, including Medicaid estate recovery.

Life estates carry both advantages and disadvantages. The most notable advantage of the life estate is that it simplifies the transfer of a home to the next generation. If the home is included in the homeowner’s will, the probate process may delay the transfer. If there is a life estate, the transfer is automatic with the filing of a death certificate.

One other potential advantage: the home is no longer an asset of the estate. That protects it from lawsuits against the estate, including “Medicaid estate recovery.” If a person is enrolled in Medicaid and receives services paid by it, state governments may sue the estate to recover the costs.

In addition to legal benefits, there are potential tax benefits:

The life tenant may be eligible for some homestead or senior tax breaks as a homeowner.
The remainderman may receive a substantial capital gains tax break when and if the house is sold (since its tax valuation will be based on its value at the time of the life tenant’s death, not at the time it was purchased by the life tenant).

However, there is a potential legal disadvantage as well: the life tenant may become involved in any legal problems that a remainderman incurs. For example, if a parent and a child have created a life estate and the child is sued for nonpayment of taxes, a lien could be filed against the parent’s home.

In any case, creating a life estate is a serious and binding decision for the owner of a home. The homeowner is giving up the option of selling or mortgaging the home (unless the remainderman agrees) and is making an irrevocable choice of an heir to the home.

Pros

Simplifies the transfer of a home to the next generation

Protects the home from debtors of the deceased

Allows older homeowners to retain the benefits of home ownership

Cons

Makes the owner vulnerable to debt actions brought against the remainderman

Can’t be undone easily if the owner’s plans or circumstances change

Restricts owner’s ability to mortgage or sell property

Like a life estate, the irrevocable trust is often a tool for estate planning. As in a life estate, the irrevocable trust removes assets from the estate of the grantor. Specifically, the grantor relinquishes all rights to some assets and income, transferring them to a trust. The assets may be cash, investments, or life insurance policies. The beneficiary of the trust may be a spouse, the grantor’s children, or a charitable organization.

Additionally, a life estate is also “irrevocable.” Once a life estate deed is established, the life tenant cannot alter the agreement without the consent of the remainderman.

Unlike a life estate, the trust does not provide a benefit, such as a residence, to the grantor.

An irrevocable trust does have its uses, however. A trust can reduce a person’s wealth on paper while transferring that wealth to family members. It also removes some of the person’s assets from an estate, eliminating them from the probate process.

A trust can be a useful strategy for a professional who is vulnerable to lawsuits–such as a physician–because it protects some of their assets by transferring them to family members under a trust.

A life estate agreement is usually undertaken as an aspect of estate planning. An older couple might consider a life estate arrangement as an alternative to naming a beneficiary in their wills. A life estate agreement gives them the right to stay in their home for the rest of their lives. When they are both deceased, an adult child or children will automatically take title to the property.

A widowed homeowner who can no longer live alone might create a life estate agreement with an adult child as the remainderman. The parent and child now co-own the home but the parent retains lifetime rights to the use of the home. Both have the assurance that ownership of the home will pass to the child without delay or interruption.

A life tenant cannot sell the property or take out a mortgage loan against it without the agreement of the remainderman. The reverse is also true: The remainderman cannot sell or mortgage the property during the lifetime of the life tenant.

The life tenant retains most of the rights and obligations of a homeowner. The life tenant can live in the home or rent it and is responsible for the taxes, insurance, and maintenance costs. Any tax benefits of homeownership go to the life tenant, too.

The life tenant does not have the right to sell the property or take out a mortgage on it without the agreement of the remainderman. The remainderman becomes a co-owner of the property but has no legal rights to live in it or use it until the death of the life tenant. Once a death certificate is filed, the life tenant can take possession.

The life estate is an estate planning tool. The primary reason for establishing it is to ensure that a home is transferred to the right person immediately after the death of the homeowner, thereby avoiding the delay of a probate court proceeding.

It also effectively removes the property from the estate. The property is not an estate asset, and its value cannot be considered in a suit against the estate. This may be particularly relevant to Medicaid recipients, whose heirs may be subject to Medicaid estate recovery proceedings.

Ownership of the property is immediately transferred to the person named as the remainderman in the life estate deed.

The co-owned property cannot be sold or mortgaged without the agreement of the remainderman.

The remainderman gets the right to reside in the home, sell it, or mortgage it only after the death of the life tenant.

The life tenant retains the responsibilities of ownership, including all costs, and is responsible for the taxes and maintenance costs.

Creating a life estate is a reasonable way for homeowners to make certain that their homes will wind up in the possession of the person they want to inherit, with a minimum amount of legal fuss or delay.

However, a life estate should only be established with the full understanding that it can’t be undone easily. The homeowner is giving up the right to sell the property or get a mortgage on it without the cooperation of the remainderman.


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