The term “life estate” often comes up in discussions of estate and Medicaid planning,
but what exactly does it mean? A life estate is a form of joint ownership that allows one
person to remain in a house until his or her death, at which time it passes to the other
owner, referred to as the person with the remainder interest. Life estates can be used to
avoid probate while giving a house to children without losing the ability to live in the
home, remaining responsible for property tax – with the benefit of homestead and age
related tax exemptions, remaining responsible for homeowner insurance, yet creating
ownership in the children at the death of the parent. This type of deed can play an
important role in Medicaid planning since Medicaid does not assign any value to a
life estate when the parent applies for Medicaid to pay for nursing home care. If
the transfer occurred prior to five years before application, there will be no penalty
for the transfer.

In a life estate, two or more people each have an ownership interest in a property, but
for different periods of time. The person holding the life estate — the life tenant —
possesses the property during his or her life. The other owner — the remainderman —
has a current ownership interest but cannot take possession until the death of the life
estate holder. The life tenant has full control of the property during his or her lifetime
and has the legal responsibility to maintain the property as well as the right to use it,
rent it out, and make improvements to it.

Another example of use of life estates is when a spouse who owns property in only his
or her name wants to leave that property to his or her children from a former marriage
but wants the later in life spouse to be protected and have a place to live. That person
might write a will leaving a life estate to the spouse with the remainder to his or her
children on the death of the spouse. This comes up not infrequently when individuals
want to protect property passed to them by family and who want to keep that property
in their blood line while protecting the spouse as well.

Life Estate Deed

When the life tenant dies, the house will not go through probate, since at the life
tenant's death the ownership will pass automatically to the holders of the remainder
interest. Because the property is not included in the life tenant's probate estate, it can
avoid Medicaid estate recovery in states that have not expanded the definition of estate
recovery to include non-probate assets, which includes Alabama at the time this is
being written.

Although the property will not be included in the probate estate, it will be included in
the taxable estate. Depending on the size of the estate and the state's estate tax
threshold, the property may be subject to estate taxation. However, the joint federal
lifetime estate tax exemption and gift tax exclusion is $5,490,000, so few people are
actually subject to estate tax.

The life tenant cannot sell or mortgage the property without the agreement of the
remaindermen. If the property is sold, the proceeds are divided up between the life
tenant and the remaindermen. The shares are determined based on the life tenant's
age at the time — the older the life tenant, the smaller his or her share and the larger
the share of the remaindermen.

Be aware that transferring your property and retaining a life estate can trigger
a Medicaid ineligibility period if Medicaid application is made within five years of the
transfer. Further, purchasing a life estate should not result in a transfer penalty if you
buy a life estate in someone else's home, pay an appropriate amount for the property
and live in the house for more than a year.

For example, an elderly man who can no longer live in his home might sell the home
and use the proceeds to buy a home for himself and his son and daughter-in-law, with
the father holding a life estate and the younger couple as the remaindermen.
Alternatively, the father could purchase a life estate interest in the children's existing
home. Assuming the father lives in the home for more than a year and he paid a fair
amount for the life estate, the purchase of the life estate should not be a disqualifying
transfer for Medicaid. Just be aware that there may be some local variations on how
this is applied, so get good advice before finalizing arrangements involving a life estate
if long term care could be a future concern.

If you are interested in creating a life estate deed, we would love to sit down with you
and answer your questions. Contact our office at (256) 519-9970 to schedule an
appointment. www.dotylawfirm.com