Question: What is a “Life Estate”?
Answer: Think about ownership of real property to consist of a bundle of rights, called “Ownership in Fee Simple,” for example: the right to use and enjoyment of the property during the owner’s lifetime; the right to use and enjoyment of mineral rights, oil & gas rights, water rights or similar interests; the right to divide one’s ownership rights with other or additional owners; and the right to determine title to the property after the death of the owner. A person with Ownership in Fee Simple owns all rights and title to the property. However, any of these individual ownership rights that make up the entire Ownership in Fee Simple can be transferred by deed to someone else without transferring the entire Ownership in Fee Simple. When this happens the ownership of the property is severed and the result is more than one person having some ownership rights in the property at the same time.
The right to use and enjoyment of the property during an owner’s lifetime is known as a “Life Estate.” It is created by the execution of a deed that either transfers a Life Estate to someone other than the person with Ownership in Fee Simple; or which transfers all other rights to the property to someone other than the person with Ownership in Fee Simple but retains a Life Estate in the fee simple owner. A Life Estate can exist based upon the owner’s lifetime or upon the lifetime of another person, although the Life Estate owner’s lifetime is usually the measuring life. The Life Estate continues only as long as the measuring lifetime. When the person whose lifetime the Life Estate is based upon dies, the Life Estate ends, that is, it simply ceases to exist. This means that a Life Estate does not go through probate to determine who will own the property after the Life Estate owner has died.
Rather, because either transferring a Life Estate or transferring all other rights and retaining a Life Estate essentially severs ownership in the property, the deed creating the life estate must be clear as to who owns the remaining interest in the property, known as the “Remainder Interest.” The owner of the Remainder Interest owns all rights to the property other than the Life Estate while the Life Estate is in existence; and owns all rights to the property altogether once the Life Estate terminates. In other words, when the Life Estate terminates, the only rights to the property remaining to be owned are already owned by the owner of the Remainder Interest, so that this person will then have Ownership in Fee Simple.
Also, if the Life Estate owner has died, the property can be sold by the owner of the Remainder Interest without the need for anyone else’s consent; and the owner of the Remainder Interest is entitled to all of the proceeds of the sale. However, due to the fact that ownership has been severed, the property cannot be sold during the lifetime of the Life Estate owner without the consent of the owners of both the Life Estate and the Remainder Interest. Further, upon sale, the proceeds must be divided between the Life Estate owner and the Remainder Interest owner according to the respective values of their interests as of the date of sale. This value is determined actuarially based upon the age of the Life Estate owner at the time of sale; and is contained in Life Estate/Remainder Tables issued by the IRS. The value of the Life Estate is expressed in terms of a decimal fraction that decreases as the Life Estate owner’s age increases. Since the total of all ownership interests must always equal 100%, the value of the Remainder Interest will increase as the value of the Life Estate decreases.
Because of the nature of the Life Estate, it is a very effective means for passing title to real estate upon death without having to go through the Probate process. It can also be an effective tool in Medicaid planning to protect the family home from Medicaid Estate recovery in those states whose Medicaid estate recovery is limited to Probate assets. However, in some states, Medicaid estate recovery rules allow the state Medicaid agency to seek Medicaid estate recovery against a Life Estate after the death of the Life Estate owner. Anyone considering a Life Estate transfer involving someone who has applied or is planning to apply for Medicaid benefits should consult a local Elder Law attorney experienced in Medicaid first to determine whether transferring a Life Estate or a Remainder Interest is even an effective strategy in that person’s state.
If you need assistance with this or other elder care matters, you can find Elder Care Professionals near you on ElderCareMatters.com – America’s National Directory of Elder Care / Senior Care Resources for Families.
John J. Campbell, Esq.
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