Please ensure Javascript is enabled for purposes of website accessibility

Benefits and Risks of Life Estate Planning

Posted on

Life estates can be a useful tool for Medicaid planning, probate avoidance and tax efficiency, but there are potential problems. It is important to understand the risks associated with life estates before invoking this planning technique.

In a life estate, two or more people 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 their life. The other owner — the remainderman — cannot take possession until the death of the life estate holder. The life tenant has control of the property during their 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.

Life estates can be a useful planning technique. They permit parents to pass ownership in their homes to their children while retaining absolute possession of the property during their lives.  If done properly, life estates can protect a home from Pennsylvania’s Estate Recovery Program.

However, there are risks and potential issues that may arise:

  • As a life tenant, it can be difficult to sell or mortgage property with a life estate interest. The remaindermen must agree if you decide to sell or borrow against the property.
  • If the property is sold, the remaindermen are entitled to a share of the proceeds equal to what their interest is determined to be at that time.
  • Without the remainderman’s cooperation, you cannot remove or change the remainderman once it is on a deed.
  • Once a remainderman is named on the deed, he or she has an interest in the home and his or her legal problems (creditor issues, bankruptcy, divorce, or premature death) could affect the property or claims against it. However, while these claims may be made against the property, no one can kick you out of it during your life.
  • Giving away an interest in property could disqualify you from receiving assistance from Medicaid, should you require long-term care within five years of the transfer.
  • A life estate does not protect the property from the imposition of inheritance tax.

As with most planning tools, a life estate can be very useful with valuable benefits, but it is not for everyone. As the law in this area is complex, it’s important to talk to a lawyer who knows about this in-depth.  Call (570) 784-4654 to schedule a consultation to discuss whether a life estate is a proper planning technique for you.

Get in touch with us today to get started with your FREE case review. We’re only a call, click, or short drive away.