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.
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.
February 25, 2019 at 6:41 pm
South Carolina residency. My mother is the tenant in her life estate. My two brothers and I are the remainder men. If I pay both of my brothers for their shares of the life estate is anyone responsible to pay taxes? I understand that my mother will still be the tenant and I the remainder until her death. My brothers are concerned that they will owe taxes if I purchase their shares. Please advise. Thank you!
September 4, 2019 at 12:03 pm
Debra, I would recommend that you talk with an attorney licensed to practice in South Carolina since I am not. I’m sorry, but I can only address Alabama law.
September 8, 2019 at 10:13 am
Can a person with a life estate interest claim homestead to get their taxes lower?
September 9, 2019 at 10:07 am
In Alabama a person retaining a life estate in homestead property continues to pay the property tax. So, yes, having homestead in a life estate is possible in AL.
October 25, 2021 at 3:29 pm
My mother is the life tenant and I am the remainderman. She allows my brother to live there and he does whatever he pleases. He has junk all over the property and the house. It is an eyesore and has hurt the property value as well. What are my rights to remove junk from property or demanding it get cleaned up to keep property in good living order?
October 27, 2021 at 9:33 am
Thanks for your question. I have sent a response by email privately.
November 16, 2021 at 3:08 pm
when the owner of the life estate passes away, do the remaindermen enjoy the step up in basis as of date DEED was signed ? or all the way to the date of parent’s death?
July 27, 2022 at 2:54 pm
The remaindermen have a date of death stepped up basis.
July 27, 2022 at 2:56 pm
The remaindermen have a date of death stepped up basis.
January 21, 2022 at 7:01 pm
Does Alabama allow Ladybird Life Estate Deeds?
January 24, 2022 at 10:20 am
No, Alabama does not permit the use of Ladybird Deeds. The Ladybird Deed differs from traditional life estate deeds in that the life tenant continues to have the right to sell or mortgage his or her home without beneficiary consent, or even cancel the deed or change the beneficiary. With a Life Estate Deed in Alabama this is not possible.
February 16, 2022 at 2:06 pm
My 80 year old mother would like to get a Life Estate Deed for her home with me as the remainderman. My brother lives with her but is not able to care for himself (physically). Is there anything we need to consider before getting the Life Estate Deed? If not, what are the steps needed to get this done?
February 16, 2022 at 3:10 pm
Hi Val, There are a number of things you need to think about in this situation. I would suggest you contact my office to make an appointment for me to speak with you and your mother about this. We can meet in person, talk by telephone or Zoom.
May 12, 2022 at 2:00 pm
If your mother might need Medicaid to pay for long term care within 5 years, transfer of the property could result in a transfer penalty. That would be the main concern.
July 19, 2022 at 10:30 am
In Alabama, can the life tenant make changes to the life estate, like change the remainderman?
July 27, 2022 at 2:44 pm
No, the life tenant cannot change the remainderman without the existing remainderman being in agreement.