Life estate: What is it and how does it work?

A home is more than just a plot of land and a building. It’s the place where you live, watch your family grow, and make innumerable happy memories. It’s natural that you want to pass your home on to your children after you die, but inheritance and wills can get complicated.

One method for transferring your home to your chosen heir is to set up a life estate. Life estates make your chosen heir a joint owner of the property, easing inheritance, while still giving you control over your home while you’re still alive.

What is a life estate?

A life estate is a legal tool that homeowners can use to ease the transfer of ownership of their property after they pass away. Put another way, it’s a way to gift your home to someone today while not actually giving them control or possession of the property until you pass away. Once the person granting the home dies, the recipient generally gets full ownership and property rights.

Life estates are usually used for homes but can be used for any type of real estate.

How does a life estate work?

A life estate creates a form of joint ownership of a home or other property. Imagine a scenario where a mother wants to leave her home to her son when she passes away. She decides to use a life estate to make the transaction smoother.

The mother granting the home, known as the life tenant or grantor, retains access and the right to use the property for the remainder of their life. She is also responsible for upkeep, property tax, and insurance payments.

The child receiving the home is known as the grantee or remainderman.

The life tenant has the freedom to make changes to the home but needs to seek her son’s approval should she want to do something like sell it or mortgage the property because the son is a joint owner.

Life estates also cannot be revoked without the grantee’s permission.

The recipient becomes a joint owner of the property and takes possession when the life tenant passes away.       

After the life tenant dies

When the life tenant dies, the grantee becomes the full and sole owner of the property granted using the life estate. Once they present the death certificate, the home’s ownership is transferred without the need for a will or probate.

Probate is a legal process that revolves around paying the decedent’s remaining debts and distributing assets from their estate. The process can take quite some time, often a year or more, so a life estate can save a lot of time. Estate taxes may still apply depending on the value of the home, the value of the rest of the estate, and where you live.

How to create a life estate

If you think a life estate is a good fit for your situation, you can use these steps as a framework for setting one up. Keep in mind that state and local laws can affect the precise process, so be sure to work with a legal professional who is familiar with the laws of your area.

1. Consider if it’s the right choice for you and your family

Before you dive in and start setting up a life estate, take a moment to think whether a life estate is the right choice.

For example, do you have an outstanding mortgage on the home? If so, a life estate can make dealing with it more complicated because you’ll need the grantee’s permission if you ever want to refinance the home or make changes to the loan. You might consider taking those steps before setting up the life estate.

A situation where a life estate might make sense is one where you have a child who you know wants to live in your home when you pass or who already lives there. Setting up the life estate will simplify inheritance for them.

If you have multiple children and want to split your estate evenly, a life estate may not be a good fit. Instead, you might want to specify in your will that the home should be sold and the proceeds divided among your heirs.

2. Hire an attorney

Life estates are complex legal structures, so you’ll want to hire a professional to help. A good attorney will be familiar with your state’s laws regarding life estates and can also advise you on the pros and cons of using one based on your personal situation.

3. Draft the life estate deed

The next step is to work with your attorney to draft the life estate deed. The deed will contain a few key things:

• The date of the deed
• The name and addresses of the grantor and grantee
• The address and a description of the property
• A statement reserving the life estate, including any terms and conditions of the life estate
• Signatures of each involved party
• Any additional clauses and conditions

Keep in mind that each state has unique rules and laws that can affect the precise look and details of a life estate deed. Your attorney can help make sure that your document is properly put together.

4. Record your life estate deed

The final step is to record the life estate deed with your local government’s property records department. You’ll usually submit the document to your city or county’s recorder’s office and pay any applicable recording fees.

Why create a life estate?

Life estates have a number of benefits when it comes to simplifying estate planning, so they could be a good fit if these perks sound good for your situation.

It allows for a simple property transfer

A key benefit of life estates is that they simplify property transfers after you die. You can name someone as the grantee for your property while you’re alive and be confident that they will become the owner of the property after you die without having to worry about a will or probate.

The life tenant is able to occupy the home

While setting up a life estate makes it easy to transfer ownership of your home, life tenants remain able to live in and modify the home for the remainder of their lives. You don’t have to worry about disruption to your life or daily routine, even while getting the benefit of knowing what will happen to your home when you die.

It protects your home from Medicaid estate recovery

Medicaid estate recovery is a process through which Medicaid programs try to get repaid for some of the benefits provided to certain people after they die. For example, states must try to recover payments for services such as nursing facilities and related hospital and prescription drug services.

Life estates protect your home from being sold to pay for estate recovery because the remainderman takes ownership of the home immediately upon your death.

Potential problems with life estates

Life estates are useful for transferring ownership of your home to someone when you die, but setting one up does mean giving up some flexibility when it comes to things like using the home as collateral for a loan. There are also other potential drawbacks to keep in mind.

• If you want to sell or refinance your home, you’ll need the grantee’s permission.
• Even if you do get permission to sell the home, the grantee is entitled to a portion of the proceeds.
• If you change your mind about who should inherit, the grantee must approve any changes you wish to make to the life estate.
• Because the remainderman is a partial owner of the home, if they run into financial issues, the home could be at risk of a mortgage lien or other legal troubles that will impact the life tenants.
• Even though the life tenant is transferring ownership of the home to someone else, they remain responsible for maintenance, insurance, and taxes while they’re still alive.
• Medicaid has eligibility rules based on the applicant’s income and assets, with a lookback period to ensure that applicants did not gift their assets to become eligible. If you create a life estate and later apply for Medicaid, you could face eligibility issues depending on the timing of your application and the creation of the life estate.

FAQs

Life estates are complex legal structures, so it’s important to ensure that you understand the ins and outs of how they work if you’re considering setting one up.

Who owns the property in a life estate?

Life estates create a sort of joint ownership between the grantor and the grantee. During the grantor’s life, they own the property and can modify it but need the grantee’s permission for certain actions, such as selling the home. Once the grantor dies, the grantee becomes the full owner of the property.

What are the obligations of a life tenant?

Life tenants have given up a portion of their ownership rights in a property, but they still have many of the obligations of property ownership. For example, life tenants must keep the property maintained and handle things like insurance and property tax payments.

Can a will override a life estate?

In general, no, a will can’t override a life estate. The life estate takes precedence. However, there are some situations that can change this, such as the inclusion of specific language in the will or life estate, as well as your state’s homestead rights. Be sure to work with an experienced lawyer who can help you understand the complexities of your state’s laws.

What is the downside of a life estate?

Life estates simplify the transfer of ownership in a property when you die, letting the recipient avoid dealing with a will or probate. In exchange, the grantor gives up some flexibility and rights related to owning the property. For example, they can’t sell it without the grantee’s permission.

How do you end a life estate?

While life estates end naturally when the life tenant dies, in some situations, a life estate may no longer be a good fit for your family or situation. For example, imagine a situation where a child who lives with you gets a new job and moves across the country. If you set up a life estate under the assumption they’d take ownership and live in the home after you die, you may now prefer that the home just be sold as part of your estate and divided amongst your heirs.

In these cases, you can terminate a life estate so long as the grantee gives their written permission. Work with a lawyer who can help you go through this process properly.

The bottom line: Consider a life estate as part of your estate plan

A life estate is a legal structure that allows a homeowner, the life tenant, to effectively give their home to an heir, the remainderman, while they’re still alive. The life tenants can continue to live in the home and make changes to it for the rest of their lives. When the life tenant dies, the remainderman becomes the owner of the home without having to deal with probate or wills, vastly simplifying the process.

There are significant pros and cons to using a life estate, so discuss your situation with an attorney before you get started. For example, life estates make things like refinancing your mortgage more complex, so if a life estate seems right for you, think about starting the refinancing process with Rocket Mortgage^® now so you can have it finished before establishing the life estate.