What is “Life Estate”?
The term “life estate” often comes up in discussions of estate and Medicaid planning. Life estates can be used to avoid probate and to give a house to children without relinquishing the ability to live in it. They also can play an important role in Medicaid planning. But what, exactly, does the term mean and how are life estates used?
A life estate is a form of joint ownership that allows one person to remain in a house until his or her death, when it passes to the other owner. 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.
When the life tenant dies, the house will not go through probate, since at the life tenant’s ownership passes 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. Even if the state does place a lien on the property to recoup Medicaid costs, the lien will be for the value of the life estate, not the full value of the property.
However, 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.
The life tenant cannot sell or mortgage the property without the agreement of the remainderman. If the property is sold, the proceeds are divided up between the life tenant and the remainderman. 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.
Be aware that transferring your property and retaining a life estate can trigger a Medicaid ineligibility period if you apply for Medicaid within five years of the transfer. But 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. This planning technique can be a useful way of “transferring” assets to a child without creating a penalty period for Medicaid purposes.
Attorney Robert A. Scalise, Jr. is a Partner of the law firm Ericson, Scalise & Mangan, PC located at 35 Pearl St., New Britain, CT. www.esmlaw.com. His practice concentrates on Elder Law, Estate Planning, Probate, Estate Administration, Title 19 Asset Preservation and Real Estate.