The phrase "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, when it passes to the other owner. Life estates can be used to avoid probate and to give a house to children without giving up the ability to live in it.  They also can play an important role in Medicaid planning, depending on your specific state.

Life Estate Possession 

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.

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. Even if the state does place a lien on the property to recoup Medicaid costs, the lien will be for the value of the life estate, not the full value of the property.

Although the property will not be included in the probate estate in that scenario, 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.

Selling a Life Estate

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 penalty period if you apply for Medicaid within five years of the transfer. 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, and Wisconsin has rules on life estates that changed in recent years, so check with your attorney.

Frequently Asked Questions (FAQs)

1. What is a Life Estate?

A life estate is a form of joint ownership in property. It involves two or more parties - the life tenant(s) and the remainderman. The life tenant has possession and control of the property during his or her lifetime, while the remainderman acquires possession upon the death of the life tenant. This form of ownership allows one to pass on property without the necessity of probate.

2. How does a Life Estate affect Medicaid Planning?

In certain states, a life estate can play a significant role in Medicaid planning. When the life tenant dies, the property doesn't go through probate and therefore can avoid Medicaid estate recovery. However, the property can be subject to a lien to recoup Medicaid costs. The value of the lien will be equivalent to the value of the life estate, not the full value of the property.

3. What happens when the property under a Life Estate is sold?

If a property under a life estate is sold, the proceeds are divided between the life tenant and the remaindermen 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.

4. Can transferring property into a Life Estate result in a Medicaid penalty?

Yes, transferring your property and retaining a life estate can result in a Medicaid penalty if you apply for Medicaid within five years of the transfer. However, purchasing a life estate in someone else's home, paying an appropriate amount for the property and living in the house for more than a year should not result in a transfer penalty.

5. Can a Life Estate avoid estate tax?

While a life estate can avoid probate, the property will still 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.

Life Estate Lawyer

If you have any questions regarding life estates or estate planning, contact the experienced attorneys at Heritage Law Office. Contact our office at (414) 253-8500 to learn more or schedule an appointment. 

Bradley J. Sarkauskas, Attorney-at-Law