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

Erica Gellerman3-minute read

March 31, 2023


When you own a home that you love, you may have a dream of giving that home to 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 the creator of the life estate (the grantor) 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 pre-gift 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.

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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, also called the 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 mother 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. The same goes for refinancing. This is why it’s easier to refinance before you start the estate planning process. 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 the holder of the remainder interest (her son), also known as 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.

Don’t forget, if the total value of the estate is above a certain amount, there will be estate tax to pay to the IRS. The tax owed will come out of the estate’s assets.

How To Create A Life Estate

There are a couple of important steps to creating a life estate. Keep in mind, every state will have different life estate rules and regulations that you should be aware of. Let’s learn how to create a life estate:

  • Consider if a life estate is the right choice for you and your family. Before you decide to move forward with life estate planning, it’s important to know what you want to do with your affairs and assets. Refinancing at the beginning of this process is an important step as it is much more difficult to do after the estate is in place.

  • Hire an attorney to help you understand the process of creating a life estate. Talking with an attorney can also help you weigh the pros and cons of a life estate, while also learning more about any state-specific rules you should be aware of.

  • Draft the life estate deed. There are several items that need to be included on a life estate deed. This includes: the date this deed was made, the name and address of the person granting the life estate, the grantee name and address, the address and description of the life estate property, a statement reserving the life estate and the signatures of all parties involved in the transaction. As mentioned above, be sure to consult an attorney and check your state’s requirements for what needs to be included in life estate deeds.

Your attorney may also suggest different options like a life estate by will that may work better for your situation.

  • Record your life estate deed. In order for a life estate deed to be valid, it needs to be recorded in the town or city that the property is in. This can typically be done at a county recorder’s office.

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 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.

In a life estate, 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 refinance, 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 the 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 mortgage 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 many important things to consider before entering into this legally binding family transaction.

Are you ready to get started on your life estate planning? Refinance with Rocket Mortgage® today.

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Headshot Erica Gellerman

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.