You may know of someone with “life rights” to a property. They are known as life tenants, and the persons involved have the right to occupy and use their property for the rest of their lives. This is known as a life estate. While they enjoy the benefits of the property that any owner would, there are limitations. Life tenants cannot sell or transfer the property, or mortgage the property in their own names. Life estates are usually irrevocable once put into place. They are an estate planning tool that helps avoid probate when the life tenants die. At the life tenant’s death, the beneficiary files the death certificate in the local land office and receives title to the property. A life estate deed avoids the gift tax that would occur if a parent signed over their home to their children during their lifetime. The life tenant does not include their property in their will since the life estate deed establishes the owner of the property.
The Remainder Owner
Life estates are created in conjunction with a remainder owner – also known as a remainderman or remainder beneficiary– who receives the property when the life tenants pass. The remainder owners are often the children of the life tenants, or perhaps the stepchildren of a spouse for whom their parent wanted to establish a life tenancy after their demise. Should the remainder owner experience financial problems while the life tenants still occupy the property, the tenants don’t have to worry about losing their home to the remainder owner’s creditors. However, the life tenants also cannot change the remainder owner even if they realize that when they die that person is probably going to lose the property.
There is another potential downside. Say the remainder owner is the child of the life tenants but dies before his parents. The new remainder owners are his heirs, and if he was married and the parents didn’t particularly get along with the spouse, that could pose a problem. However, no matter the identity of the remainder beneficiary, they must adhere to the life estate agreement.
If life tenants change their mind after establishing the life estate, they can sell the property if it is done in conjunction with the remainder owner. Should the remainder owner not agree to the sale, however, the life estate remains in effect. If those considering a life estate deed are troubled by this aspect, there is an alternative to the life estate deed known as the lady bird deed.
The Lady Bird Deed
A lady bird deed – which is not permitted in all states – allows the life tenant to sell the property without involving the remainder beneficiaries. The life tenant also has the right to change the remainder beneficiary under this scenario. As with a standard life estate deed, a property held under a lady bird deed also avoids probate at the life tenant’s death.
Life Tenant Responsibilities
The life tenant is responsible for paying the bills connected with the property, including taxes, homeowner’ insurance, maintenance, and utilities. If something in the dwelling needs repairs, it’s the life owner who must have it fixed.
If there are tax breaks associated with the property, it’s the life tenant who receives them, not the remainder owner. If the property is located in a state offering homestead exemptions on a primary residence, the life tenant is eligible.
Life Tenant Decisions
Should the life tenant decide that living on the property no longer fits their plans, the house doesn’t just shift back to the remainder owner. As long as the life tenant is still literally alive, it is their property to use, and that includes renting it out to a third party. It’s the life tenant who receives the rental income, but they are also responsible for maintenance and repairs as with any rental ownership.
Medicaid and Life Estates
The typical life tenant is an older person who wants to stay in their home. Unfortunately, this is also the age group most likely to enter a nursing home within a few years. Medicaid regulations include a five year “look back” period for any transfer of property from a homeowner to their children or other relatives or friends. If the transfer is made outside of this five-year period, the life estate transfer remains in effect even if the life tenant must enter a nursing home. However, if the transfer was made less than 60 months previously, it is disqualified by Medicaid. This disqualification is one of the few circumstances in which the life estate is revoked. The life estate transfer then goes back to the original owner, and the property is sold when the owner dies to pay Medicaid debts.
Life Estate Alternatives
Life estates are useful tools, but they aren’t for everyone. Alternatives to creating a life estate include having the owners place the property in a revocable living trust and naming the person who would have been the remainderman in a life estate deed as the beneficiary. The property is now owned by the trust, not the tenants, but they continue using the property much as before and are free to change the terms of the trust. When the person or persons establishing the trust – known as the grantors – die, the trust becomes irrevocable and cannot change. A person can create a life estate in their will. That is often the case when the house belongs to one spouse and they want to ensure their current spouse continues to have use of the property until their death. Upon the death of the stepparent, the property goes to the heirs of the home’s late owner.