Life estate ownership arrangements are frequently used to help older adults achieve their estate planning goals.  But, a “life estate” can be a confusing concept for clients because it involves splitting the ownership of a home or other property over time.

In a life estate, two or more people each have an ownership interest in a home or other 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 tenant. 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.

The life tenant’s interest ends automatically upon death and full ownership of the property passes to the owner(s) who hold the remainder interest.

A common use of this ownership arrangement involves a parent who wants to “give the house to the kids” while retaining the ability to live in and control the property during the parent’s lifetime. To accomplish this, the parent deeds the home to the children but reserves a life estate for him or herself. Upon the parent’s death the property will pass to the children outside of probate and (in Pennsylvania) free from government Medicaid estate recovery claims. (See my article “How to Avoid Medicaid Estate Recovery.”)

Although the property will not be included in the probate estate, the life estate property will usually be included in the taxable estate of the life tenant. This means that the Pennsylvania inheritance tax will apply. And the federal estate tax could apply if the estate is very large.

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 you apply for Medicaid within five years of the transfer.  It is wise to consult with an experienced elder law attorney before establishing a life estate arrangement.

Marshall, Parker & Weber is open and available to help you assess what documents you may need or whether your current plan is in good shape. Call us at 800-401-4552 to schedule an appointment. You can also check out our portal for complimentary blog articles, videos and webinars.
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