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Life Estate: What Does It Mean And How Does It Work?

Erica Gellerman3-minute read

October 26, 2021


When you own a home that you love, you may have a dream of passing that home onto your children once you pass away. But realizing that dream isn’t always simple. To pass the ownership rights of your home to another person, you’ll generally need to do that through legal documentation like with a will, a trust, or a life estate.

What Is A Life Estate?

A life estate is something to consider during estate planning. When an owner of a home signs a life estate, they are in effect passing part of the ownership of a home to another person. This could be thought of as a way to pregift your home to your heirs while still retaining joint ownership.

You’ll often find life estates used for homes, but they can be used for any type of real property – land, and anything attached to the land.

Life Estate Deed

A life estate deed permits the property owner to have full use of their property until their death, at which point the ownership of the property is automatically transferred to the beneficiary.

These deeds are typically created when a person wants to pass a piece of property to an heir without the need for a will or for the process of probate after they pass away. In the right situations, it can be a streamlined and easy way to transfer ownership.

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How Does A Life Estate Work?

Life estates create a sort of legal joint ownership of a piece of property. For example, let’s say a mother wants to pass her home to her son when she passes away. She decides to use a life estate to make the transaction smoother.

She’d establish a life estate for her home, which would make her the life tenant and her son the remainderman or beneficiary. She can continue to live in her home for the remainder of her life if she chooses to and is responsible for making property tax and insurance payments.

While it doesn’t sound like much has changed, it has. As a life tenant, the mom no longer has full control over her house. She’ll need to get approval from her son to make large changes like selling it or taking out a mortgage. She also can’t revoke the life estate without his consent, so it’s important for her to make sure it’s the right solution for her family.

Upon her death, the house title would be immediately passed to her son, the remainderman. Rather than going through probate, the only thing that would need to be done to pass ownership is to file her death certificate.

Why Create A Life Estate?

Life estates are valuable options for some families seeking to simplify the estate planning process.

A life estate helps avoid the probate process upon the life tenant’s death. The property will automatically transfer to the remainderman, making the process simple and easy – a will isn’t needed for the transfer to happen. This can provide relief and comfort to the life tenant as they know exactly what will happen to their property upon their death.

The life tenant is also able to use and occupy their home for the remainder of their life and be transparent with beneficiaries about what will happen with the property upon their death.

It’s also a way to protect the home from Medicaid estate recovery. If a person needs care and is eligible to receive Medicaid, the government may try to recover the costs of the care from their estate once they pass away. A life estate can protect the home from being included in the Medicaid recovery process as it immediately passes to the remainderman.

Potential Problems With A Life Estate

While a life estate can be helpful in some situations, when things get complicated, it can create problems.

The life tenant loses control to make major decisions related to the property without input. For example, if the life tenant wants to sell or lease the home or get a mortgage, they need approval from the remainderman. If the life tenant wants to terminate the life estate or change the remainderman/beneficiary, they will need approval from all remainderman to do so.

Even if the remainderman agrees that a sale of the home is a good idea, the life tenant shouldn’t expect to get the entire proceeds – they’ll be split based on IRS actuarial tables.

If the remainderman finds themselves in financial trouble, creditors may be able to file a lien on the property, which would create a tough situation for the life tenant.

And don’t forget, the life tenant is still responsible for making property tax payments and maintaining insurance as if they still own the property outright.

The Bottom Line

Owning a home can be a lifelong dream for some people, and the opportunity to pass that home on to their heirs with a life estate can seem like a good option. But there are drawbacks to life estates that should be considered before entering into this legally binding transaction.

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Erica Gellerman

Erica Gellerman is a CPA, MBA, personal finance writer, and founder of The Worth Project. Her work has been featured on Forbes, Money, Business Insider, The Everygirl, The Everymom and more.