Who owns the property in a life estate?

A life estate is a unique legal arrangement in real estate. It splits property ownership between two parties: the life tenant and the remainderman. Each has specific rights and responsibilities. But who owns the property during a life estate?

Understanding this is critical for real estate professionals, exam-takers, and anyone involved in property transfers.

In this guide, we’ll explain what a life estate is, who owns the property, and how it works. We’ll also include practical examples to make the concept easier to understand and memorize.

What is a life estate?

A life estate is a legal arrangement where ownership of a property is divided between:

1. The life tenant: This person has the right to use and live in the property for their lifetime.
2. The remainderman: This person gains full ownership of the property after the life tenant passes away.

The life tenant has a present interest in the property, while the remainderman holds a future interest.

For example, a parent might create a life estate, allowing them to live in their home for the rest of their life. When they pass away, ownership automatically transfers to their child, the remainderman, without going through probate.

Types of life estates

Life estates come in two forms: traditional life estates and enhanced life estates, also known as Lady Bird deeds.

1. Traditional Life Estate: This type is created through a deed and gives the life tenant the right to use and live on the property for their lifetime. However, the life tenant cannot sell the property, mortgage it, or make significant changes without the remainderman’s consent.
2. Enhanced Life Estate (Lady Bird Deed): A Lady Bird deed offers more flexibility. It allows the life tenant to:

• Change the remainderman at any time.

• Use the property freely, even if it decreases in value. For example, you could remodel the house, build something new, or even sell parts of the land.

• Sell or mortgage the property without the remainderman’s permission.

Lady Bird deeds are only available in a few states, including Florida, Michigan, Texas, Vermont, and West Virginia, and the rules vary in each state. If you own property in one of these states, a Lady Bird deed might be a great option for you and your family, providing more control while preserving inheritance plans.

Who owns the house in a life estate?

Ownership in a life estate is shared. The life tenant and the remainderman both have rights, but their rights are different.

• During the life tenant’s lifetime: The life tenant has exclusive rights to use, occupy, and benefit from the property. This includes living there, renting it out, or receiving income from it. However, they cannot sell or mortgage the property without the remainderman’s consent.
• After the life tenant passes: The remainderman gains full ownership. At this point, they hold both the present and future interest in the property.

Key responsibilities of the life tenant

The life tenant must take care of the property and pay related expenses, such as:

• Property taxes
• Homeowner’s insurance
• Maintenance and repairs

If the life tenant neglects these responsibilities, it can affect the value of the remainderman’s future interest.

What happens when the life tenant passes?

After the life tenant’s death, their rights to the property end. The remainderman automatically becomes the sole owner. This transfer happens outside probate, which simplifies the process for the remainderman.

For example, if a parent is the life tenant and their child is the remainderman, the child gains full ownership of the real property as soon as the parent passes. There’s no need for court approval or additional legal steps.

Advantages of a life estate

A life estate offers several benefits:

1. Avoids probate: The property transfers directly to the remainderman without going through probate court.
2. Right to stay: The life tenant can live in the property for their lifetime, ensuring stability.
3. Estate planning tool: It helps divide property between heirs in a clear, legally binding way.
4. Tax benefits: Life estates can reduce estate taxes in some cases.

Disadvantages of a life estate

Life estates also have some downsides:

1. Lack of flexibility: The life tenant cannot sell or refinance the property without the remainderman’s consent.
2. Legal issues: Disagreements between the life tenant and remainderman can complicate property management.
3. Irrevocable: Once created, a traditional life estate is difficult to change or cancel.

Practical example 

Imagine a woman named Mary owns a house. Mary creates a life estate and names her daughter, Lisa, as the remainderman.

• While Mary is alive, she is the life tenant. She can live in the house or rent it out. She pays property taxes, insurance, and repairs.
• When Mary passes, Lisa becomes the full owner of the house. The title automatically transfers to Lisa without probate.

How to create a life estate?

To create a life estate, the property owner must prepare a life estate deed. This legal document specifies:

• The life tenant (current occupant).
• The remainderman (future owner).

The deed should be signed, notarized, and filed with the local county recorder’s office to be legally binding. Consider involving a real estate planning attorney for experienced advice.

Tax implications of a life estate

Life estates can have tax benefits:

• The remainderman may receive a stepped-up basis in the property’s value. This can reduce capital gains taxes if they sell the property after inheriting it.
• The life tenant can claim property tax deductions if they continue to live in the home.

Alternatives to a life estate

A life estate is a great way to pass property to heirs and avoid probate. But it isn’t the only option. There are other ways to protect your assets:

1. Transfer-on-death (TOD) deed

A TOD deed allows you to name beneficiaries who will inherit your property when you pass away. It is flexible. You can change or cancel it at any time. This makes it different from a life estate, which is usually permanent once created.

2. Revocable living trust

A revocable living trust allows you to put assets into a trust to avoid probate. You remain in control of the trust while you are alive. You can change or cancel it whenever you want.

3. Irrevocable living trust

An irrevocable trust is more restrictive. Once you transfer assets into it, you give up ownership. The trust protects these assets from taxes and lawsuits. However, you cannot make changes to it after it is created.

Each alternative has pros and cons. Choose the option that fits your needs and provides the level of flexibility or protection you want.

Life estate vs. other ownership arrangements

It’s important to understand how life estates differ from other property ownership types:

1. Joint Tenancy: In joint tenancy, all owners share equal rights to the property during their lifetimes. Ownership transfers to the surviving joint tenant(s) upon death.
2. Tenancy in Common: Each owner has a distinct share of the property, which can be transferred or inherited separately.
3. Fee Simple Ownership: The owner has full control over the property, with no remainderman or restrictions.

Life insurance as an income stream

Most people use a life estate to pass property to their heirs. However, it can also be used to create income for someone during their lifetime.

In this setup, the life estate includes investments that generate income, like bonds or real estate investment trusts (REITs). The life tenant receives regular payments from these investments for the rest of their life. However, they cannot access the principal amount.

If the life tenant and remainderman agree to sell the property, they must share the proceeds. The life tenant’s share depends on their age and current interest rates. As the life tenant gets older, the remainderman’s share increases.

This type of life estate ensures a steady income for the life tenant while preserving the remaining assets for the remainderman.

Viager agreement

In France, a unique type of life estate called a viager allows a homebuyer to arrange a life tenancy with an elderly homeowner. The buyer agrees to pay the homeowner a regular income, often monthly, in exchange for being named as the designated remainderman. 

This agreement enables the homeowner to retain the right to live in the property for the rest of their life while receiving financial support. Upon the homeowner’s death, the buyer gains full ownership of the property.

Even thought it has some similarities with life estates arrangements they are not the same, and this viager agreements are nor legal in the US.

Life estate and Medicaid

A life estate can protect a home from being claimed by Medicaid. Medicaid often helps people pay for long-term care. However, they may try to recover costs by placing a lien on the person’s estate after they die.

If the person created a life estate before applying for Medicaid, the home is no longer part of their estate. This means Medicaid cannot place a lien on it or force it to be sold.

Things to consider

• Medicaid has a “look-back period,” usually five years. If you create a life estate within this period, it could affect your eligibility.
• Consult a legal or financial advisor to make sure the life estate complies with Medicaid rules.

A life estate can be a powerful tool to protect a family home from Medicaid recovery. It ensures the property passes to heirs without being used to pay for care costs.

Common questions about life estates

Can a life estate be revoked?

Life estates are typically irrevocable once created. However, they can be changed if all parties agree and sign a new deed.

Who pays for repairs?

The life tenant is responsible for routine maintenance and repairs. Major improvements, like a new roof, may require the remainderman’s consent.

Does a remainderman own the property?

A life estate involves shared ownership. The life tenant and the remainderman each have rights, but those rights differ. When the life tenant passes away, the remainderman gains full ownership, holding both present and future interest in the property.

What happens if the life tenant moves out?

The life tenant can rent the property or leave it vacant. However, they remain responsible for property taxes and other expenses.

Who owns the property if the life tenant sells or rents it?

The life tenant can rent the property and keep the income. However, selling or mortgaging the property requires the remainderman’s agreement. This is because the remainderman holds a future ownership interest. So, the property cannot be transferred without their consent.

Wrapping up

A life estate is a freehold estate that is divided between a life tenant and a remainderman. While the life tenant has the right to use and benefit from the property during their lifetime, the remainderman gains full ownership after the life tenant passes.

This arrangement offers benefits like avoiding probate and simplifying inheritance. However, it also has limitations, such as reduced flexibility for the life tenant.

Understanding life estate is essential for real estate professionals and exam-takers. It’s a common topic in real estate law and a powerful tool in estate planning. With the right knowledge, you can confidently navigate questions about life estates and their impact on property ownership.