An ownership interest in real property is a combination of a bundle of different rights, the rights to possession, use, transfer, encumber and exclude. A life estate is a type of joint ownership of real property with ownership “split” between a present interest and a remainder interest. The individual holding the life estate – the life tenant retains the legal right to possess and use the property during their lifetime. Upon the death of the life tenant, the property passes to the person or person who hold the remainder interest – without the need for probate. At that point, the remainderman assumes all property rights and obligations. The remainderman then gets the entire bundle of real property rights.
A life estate is usually created through a deed, but can be created in a Will or a trust. For example, Husband’s Will may leave a vacation home to his spouse for her lifetime and to his children upon her death. Alternatively, an owner can execute a deed transferring the property to a third party and retain a life estate on the face of the deed.
The life tenant is entitled to all rents and profits during their lifetime. The life tenant must maintain and pay costs on the property, including property taxes and upkeep. The remainderman has no right to use the property or collect any income generated by the property while the life tenant is still living. The remainderman does however have an interest in ensuring that the life tenant does not damage the property or diminish its value.
A life tenant does not have complete control over the property because they do not own the whole bundle of rights. The life tenant cannot sell, mortgage or in any way transfer or encumber the property. If either party wants to sell the property, both the life tenant and remainderman must agree. The life tenant usually receives a smaller portion based on the value of the life estate, calculated using actuarial tables.
These split interests therefore can be valued. The owner holding the remainder interest, you have a right to bequeath the remainder interest by the terms of your will; or you can sell or give away the remainder interest during your lifetime.
The transfer of real property subject to a life estate is a tactical estate planning tool used to avoid the probate of real property after death. A life estate can also protect real property from certain creditors. Medicaid cannot put a lien on real property when the recipient only has a life estate because a life estate is not a probate asset. Therefore, Medicaid cannot recover from a Medicaid recipient’s estate for the cost of services rendered.
Life estates can be valuable options for clients seeking to simplify their estate planning. However, there are pitfalls. It is wise to discuss whether this option is suitable for your specific estate plan with an experienced estate planning attorney.