If you own property or real estate, you might consider passing it along to your heirs when you pass away. But you may not want to give up any of your rights to the property during your lifetime. Creating a life estate that conveys life tenant status to you is one possible solution. The rights of life tenants include being able to enjoy the use of a property and collect any rent payments generated by it during their lifetime.
A financial advisor can help you create an estate plan for your family’s needs and goals.
A life estate is a legal arrangement in which the holder retains an interest in a piece of property during their lifetime, then transfers it to someone else when they pass away. Life estates can be created by deed. A life estate deed names the life tenant and the beneficiary or beneficiaries of the property.
So why would someone create a life estate? One of the chief advantages of doing so is to allow heirs to avoid the probate process for assets included in the estate. Probate is the legal process in which a deceased person’s assets are inventoried by an executor, their outstanding debts are paid and remaining assets are distributed to their heirs. This distribution can occur according to the terms of a last will and testament or state inheritance laws if the person dies without having a will in place.
Probate can be costly and time-consuming for everyone involved. Creating a life estate allows assets in the estate to bypass probate entirely. Life estates can also be used for Medicaid planning. Assets held in a life estate are not counted as financial resources for Medicaid eligibility. Life estates can also reduce capital gains tax for heirs if they decide to sell the inherited property.
A life tenant is someone who has a lifetime interest in a life estate and its underlying assets. If you create a life estate, then you can name yourself as a life tenant. This is something you may consider doing if you want to leave your home to your adult child, for example. You also have the option to name someone else as a life tenant for the property you own.
Life tenancy lasts for the duration of your natural life if you’re the life tenant. If you’ve named someone else as a life tenant, the duration is their lifetime instead. The person who stands to inherit the property after your death is called a remainderman. While the life tenant is alive, they share ownership of the property with the remainderman.
Life tenancy conveys certain rights, which cannot be infringed upon. Specifically, a life tenant has the right to:
So, for example, say you want to leave your home to your adult son. You could set up a life estate with yourself as the life tenant and your son as the remainderman. As long as you’re living, you’d be able to live in the home and enjoy its use. Your son wouldn’t be able to evict you. And if you were to move into long-term nursing care and rent the home out, you’d have the right to collect the rental income generated by the property.
If you own a property that has gas, oil and mineral right leases in place prior to the creation of the life estate, you’d still be entitled to receive those royalty payments. Any new leases undertaken after the life estate is created would have to be agreed upon and signed by both you and your remainderman.
There are, however, some things that a life tenant cannot do without the consent of the remainderman. As a life tenant, you cannot:
So if you set up a life estate and put your home in it, then decide you want to take out a home equity loan to make improvements you wouldn’t be able to do that. You may also run into issues if you’re hoping to get a reverse mortgage to create an additional stream of income for retirement. Life estates are irrevocable, which means once you create one it can’t be revoked or reversed.
Along with understanding the rights of life tenants, it’s also important to know what responsibilities being a life tenant entails. As a life tenant, you’re responsible for:
While you might ask the remainderman for their help with these costs, they’re not obligated to pay anything toward them.
There is one upside, however. The rights of life tenants extend to claiming tax breaks related to homeownership. So if you have a mortgage on the property, for example, you could still claim the mortgage interest deduction if you itemize. You could also claim deductions for state and local taxes, including property tax.
Creating a life estate could offer some protection to you if you’d like to leave real estate to your heirs but still retain use of that real estate during your lifetime. The rights of life tenants are broad enough to give you some leeway in what you can do with the property, including collecting rental income. And again, you’d still get any associated tax benefits of homeownership.
On the other hand, a life estate can be problematic if there’s a possibility you’ll want to sell the home at some point or borrow against your equity. If you need to move into a long-term-care facility, for instance, you may need cash to pay for those costs. Selling the home may be the best option if you don’t have a long-term care insurance policy and don’t qualify for Medicaid.
You wouldn’t be able to do that, however, without the consent of the remainderman. If the person who stands to inherit the property from you is unwilling to part with it, that could create financial difficulties. Not to mention, it could put a strain on your relationship.
Talking to an estate planning attorney or your financial advisor can help you get a better understanding of life tenant rights and how a life estate works. They may also be able to offer alternatives to a life estate if you’re concerned about the potential downsides of becoming a life tenant.
Life tenant rights can offer certain protections to you if you decide to leave your home or other real estate you own to someone else. You may also find a life estate helpful for Medicaid planning if you think you might need long-term care and aren’t sure how you’ll be able to pay for it.
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Rebecca Lake, CEPF®Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She's worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children. Rebecca also holds the Certified Educator in Personal Finance (CEPF®) designation.
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