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When discussing Medicaid planning, the phrase, “life estate” is sometimes mentioned, but what does it mean? A life estate is a form of joint ownership on a property that allows one person to remain in the home until his or her demise. Upon his or her death, the house 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.
With a life estate, two or more people each have an ownership interest in a property, but at different points in time. The life tenant (person holding the life estate), possesses the property during his or her lifetime. The remainderman (other owner, ie. Child) has a current ownership interest, however, cannot take possession until the death of the life tenant.
During the lifetime of the life tenant, he or she has full control of the property and has the legal responsibility to maintain the property. The life tenant also has the right to use it, rent it and make improvements as they see fit, however, cannot sell or mortgage the property without the agreement of the remainderman. If the property is sold, the proceeds of the sale are divided among the life tenant and the remainderman. If sold, the life tenant may receive a lesser share of the proceeds as 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.
Upon the death of the life tenant, the house will not go through probate as the ownership passes automatically to the remainderman. In addition, because the property is not included in the life tenant’s probate estate, it can avoid Medicaid estate recovery.
Although the property will not be included in the probate estate, it will be included in the taxable estate. If the size of the estate is larger than $5.49 million (for 2017), the property may be subject to estate taxation.
To find out if a life estate is appropriate for your situation, contact an experienced elder law attorney.