Life estate: How it can help you & generations to come

Life estate isn’t top of mind when you think real estate but it may be an option you should consider. Real estate is an industry full of jargon and terms that can be confusing. Life estate is probably one of those terms.

In basic terms, life estate denotes the ownership of a property for the length of a person’s life. Once the person – referred to as a “life tenant” – passes away, ownership of the property is passed to another person — usually a “remainderman” (usually a life tenant’s heirs or children) or to its original owner or “grantor.”

How does it work?

During their lifetime, the life tenant maintains full control of the property. They can live in it or rent it out, and are responsible for its upkeep and for any improvements required. However, the life tenant can’t sell or mortgage the property unless the remainderman agrees to it.

If they do, the remainderman is entitled to a share of the proceeds. The percentage of the share they receive is based on the age of the tenant: the older the tenant, the more the remainderman gets.

Benefits of life estate

The main benefit of life estate is that the property does not have to go through probate. Life estate can also protect the home from a Medicaid lien – there is a five year penalty period imposed should one of the life tenants require nursing home Medicaid.

There are also income tax advantages for heirs, namely in terms of a stepped-up income tax basis for capital gains purposes. Your accountant can tell you your potential individual benefits.

There are plenty of resources and experts in this area if it’s something that could work for you. If it’s not something you’ve ever considered, it might be worth a look.