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

March 27, 2024 5-minute read

Author: Victoria Araj


When you own a home that you love, you may dream of giving that home to your children once you pass away. But ensuring this dream comes to fruition isn’t always simple.

You’ll generally need to pass ownership rights of your real estate to another person through legal documentation like with a will, a trust or a life estate.

In this article, we’ll take a closer look at what a life estate is, how it works, how to create one and common problems that can arise when establishing one.

What Is A Life Estate?

A life estate is a form of joint ownership that allows the current property owner to remain in the home until they die, at which point it’ll pass to the other specified owner. A life estate can be thought of as a way to pre-gift your home to your heirs while still maintaining ownership through your lifetime.

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

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 leave her home to her son when she passes away. She decides to use a life estate to make the transaction smoother.

She establishes a life estate for her home, which makes 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 won’t need to get approval from her son to make large changes or upgrades. Selling it or taking out a mortgage, though, would require his approval. 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.

After The Life Tenant Passes

Upon her death, the house title would be immediately passed to the holder of the remainder interest (her son). Rather than going through probate, the only requirement to pass ownership is to file her death certificate.

If the estate’s total value exceeds a certain amount, it will be subject to an estate tax payable to the IRS. The tax owed will come out of the estate’s assets.

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How To Create A Life Estate

There are a few important steps to creating a life estate. Be aware that every state will have different life estate rules and regulations. Let’s learn how to create a life estate:

1. Consider If It’s 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.

2. Hire An Attorney

Talking with an attorney can help you weigh the pros and cons of a life estate and learn more about any state-specific rules you should be aware of.

3. Draft The Life Estate Deed

Next, you’ll draft the life estate deed. Several items need to be included on a life estate deed, including:

  • The date this deed was made
  • The name and address of the person granting the life estate
  • The grantee's name and address
  • The address and description of the life estate property
  • A statement reserving the life estate
  • The signatures of all parties involved in the transaction

As mentioned above, consult an attorney and check with your state for required information on life estate deeds. Your attorney may also suggest different options, like a life estate by will, that may work better for your situation.

4. Record Your Life Estate Deed

For a life estate deed to be valid, it must 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?

For families seeking to simplify the estate planning process, establishing a life estate can be a valuable option. Let’s take a look at some ways a life estate can benefit those involved.

It Allows For A Simple Property Transfer

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. This can provide relief and comfort to the life tenant because they know exactly what will happen to their property upon death.

The Life Tenant Is Able To Occupy The Home

When a life estate is established, the life tenant can use and occupy their home for the remainder of their life and be transparent with beneficiaries about what will happen with the property when the life tenant dies.

It Protects Your 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 care from the person’s estate via Medicaid estate recovery 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.

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Potential Problems With Life Estates

While a life estate can be helpful in some situations, when things get complicated, it can create problems. Let’s take a look at some potential issues for life tenants involved in a life estate.

  • The life tenant loses control over selling or refinancing: In a life estate, the life tenant loses control to make major decisions related to the property without input. If the life tenant wants to sell or lease the home or refinance, they need approval from the remainderman.
  • The life tenant won’t receive the entirety of proceeds from a sale: IRS actuarial tables dictate how the proceeds will be split. So, even if the remainderman agrees with the life tenant’s decision to sell the home, the life tenant shouldn’t expect to get all the money.
  • The life tenant needs approval to terminate or change the life estate: If the life tenant wants to terminate the life estate or change the remainderman/beneficiary, they will need approval from all remaindermen.
  • The life tenant may be burdened by the remainderman’s financial hardships: 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.
  • The life tenant remains responsible for taxes and insurance: Even with joint ownership, the life tenant is solely responsible for paying property taxes and maintaining insurance as if they 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 to their heirs with a life estate can seem like a good option. But there’s much to consider before entering into this legally binding family transaction.

Are you ready to get started on your life estate planning? Remember, refinancing can be a good first step, since doing so after the life estate is established will be more complicated. Take action and start the refinance process with Rocket Mortgage® today.

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Victoria Araj

Victoria Araj is a Section Editor for Rocket Mortgage and held roles in mortgage banking, public relations and more in her 15+ years with the company. She holds a bachelor’s degree in journalism with an emphasis in political science from Michigan State University, and a master’s degree in public administration from the University of Michigan.