What Is a Life Estate?

Definition and Example of a Life Estate

A life estate provides that one or more people—the life tenant(s)—have an ownership interest in the property until death. The remainderman receives interest in the property once the life tenant passes away, and only when that occurs—unless the life tenant conveys their interest to the remainderman.

For example, suppose you purchased a home and had a life estate recorded on the deed with your younger brother as the remainderman. You left the house in your will to your eldest son, who decides to sell it upon your death. However, he cannot sell the home, because interest has been passed on to your younger brother.

How Does a Life Estate Work?

The life tenant is responsible for maintaining the property during their lifetime. They can improve upon it, but they can't encumber it by using it as collateral for a loan or mortgage, and they can't sell it.

The property passes automatically to the remainderman upon the death of the life tenant by operation of law and the terms of the lease, so there's no need for probate. A life estate is similar to a joint tenancy with rights of survivorship in this respect.

Types of Life Estate Deeds

A life estate deed can be either traditional or enhanced. The enhanced version is often referred to as a "Lady Bird" deed. The significant difference between the two is that an enhanced life estate or Lady Bird deed allows the life tenant to borrow against the property or even sell it during their lifetime.

Disadvantages of a Life Estate

A life estate can solve lots of issues, but there can be downsides worth considering before you jump in:

• You must have the permission of the remainderman, and in most states, the spouse of the remainderman, before you can sell the property or use it as collateral for a mortgage or loan.
• You might also be limited in the type of financing you can get on the property. 
• You can't revoke or amend the life estate deed if you later change your mind about it, at least not without the cooperation and consent of the remainderman.
• The remainderman's creditors can place a lien against the property, but they can’t force you to give up your life tenant rights. However, you would have to pay off the lien if you and your remainderman were to sell the property.
• A life estate affords you few protections if your remainderman files for bankruptcy or goes through a divorce.
• Your remainderman's heirs will become the remaindermen if the remainderman predeceases you.
• A life estate doesn't protect property from foreclosure.

Life Estates and Medicaid

Medicaid is a safety net entitlement program, so it has strict rules governing how much you can own if you want to take advantage of the program.

Owning a home is usually enough to disqualify you from Medicaid eligibility. The property might also be subjected to Medicaid liens that would allow Medicaid to recoup some or all of the benefits it provided to you. The house won't count against your assets in assessing your eligibility if you transfer the property to a trusted friend or relative and retain a life estate in it for at least five years.

How to Create a Life Estate

Setting up a life estate is generally much easier and less expensive than creating a living trust. It's a matter of creating the appropriate deed, but it has many legal ramifications.

You should conduct an honest assessment of why you think a life estate would be a good idea for you. You might consider a life estate if:

• You want to transfer the property but retain access during your lifetime.
• You want a measure of certainty as to who gets the property at your death.
• You think you might need to use Medicaid to go into a nursing home after five years have passed, and you want to avoid Medicaid liens on the property.