What is a Life Estate?: Estate Planning Basics

When discussing estate and Medicaid planning, the phrase “life estate” is sometimes mentioned, but what does it mean?

A life estate is a form of joint ownership that allows one person to remain in a house until their death, when it passes to the other owner.

Elder law attorneys use life estates to help their clients with:

• avoiding probate
• passing their house on to their children without having to give up the ability to live in it
• Medicaid planning

Who Owns the Property in a Life Estate?

With a life estate, two or more people each have an ownership interest in a property, but at different periods of time.

The life tenant is the person holding the life estate. They possess the property during their lifetime. The remainderman (the other owner, such as a senior’s adult child) has a current ownership interest; however, the remainderman cannot take possession until the death of the life tenant.

What Are the Benefits of Life Estates?

During their lifetime, the life tenant has full control of the property as well as the legal responsibility to maintain the property. The life tenant also has the right to use the property, rent it, and make improvements as they see fit, but they can’t sell or mortgage the property without the agreement of the remainderman. So, it may be easier to refinance, if necessary, before developing the life estate.

If the property is sold, the proceeds of the sale are divided between the life tenant and the remainderman. If sold, the life tenant may receive a lesser share of the proceeds, as the shares are determined based on the life tenant’s age at the time – the older the life tenant, the smaller their share.

Upon the death of the life tenant, the house will not go through probate. In other words, the ownership of the house will pass automatically at that time to the remainderman. In addition, because the property is not included in the life tenant’s probate estate, it can successfully avoid Medicaid estate recovery.

Estate Taxes

Although the property will not be included in the probate estate, it will be included in the taxable estate.

Currently, those with extremely high net worth need to be concerned about the potential of having to pay an estate tax. As of 2023, if the size of the estate is larger than $12.92 million, the property may be subject to estate taxation.

Wait, What Is an Estate Tax?

An estate includes everything that an individual owns, from their real estate and vehicles to their bank accounts and stocks. After an individual passes away, their estate may be subject to an estate tax – also often called a “death tax.” The IRS calls it a tax on your right to transfer your property at your death. (Again, as mentioned above, your estate will be required to file an estate tax return only if your entire estate is valued at more than $12.92 million.)

Medicaid Eligibility

Be aware that transferring your property and retaining a life estate can trigger a Medicaid ineligibility period if you apply for Medicaid within five years of the transfer. Purchasing a life estate should not result in a transfer penalty if you buy a life estate in someone else’s home, pay an appropriate amount for the property, and live in the house for more than a year.

For example, a senior who can no longer live in their home might sell it and use the proceeds to buy a home for themselves and their son and daughter-in-law, with the father holding a life estate and the younger couple as the remaindermen. Alternatively, the father could purchase a life estate interest in the children’s existing home.

Assuming the father lives in the home for more than a year and paid a fair amount for the life estate, the purchase of the life estate should not be a disqualifying transfer for Medicaid. Just be aware that there may be some local variations on how this is applied, so check with your attorney.

If you want comfort knowing exactly what will happen to your home upon your death, a life estate may be a great option. An elder law attorney can help you find out if a life estate is appropriate for your situation. Then a legal strategy is necessary to transfer property while qualifying for Medicaid benefits.

To find out if a life estate is the right plan for you, please reach out to Sowards Law Firm at (408) 371-6000 or info@SowardsLawFirm.com.