Date: November 21, 2022

When discussing estate and Medicaid planning, the phrase “life estate” is sometimes mentioned, but what 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. Elder law attorneys use life estates to help 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.

How Does a Life Estate Work?

With a life estate, two or more people each have an ownership interest in a property, but at different periods of time. The life tenant (person holding the life estate) possesses the property during their lifetime. The remainderman (other owner, i.e., child) has a current ownership interest; however, they cannot take possession until the death of the life tenant.

What Are the Benefits?

During the lifetime of the life tenant, they have full control of the property and 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, but they can’t sell or mortgage the property without the agreement of the remainderman. So, it may be easier to refinance if necessary before developing the life estate.

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 their share.

Upon the death of the life tenant, the house will not go through probate, as at 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.

Estate Taxes

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 $12.06 million (for 2022), the property may be subject to estate taxation.

Medicaid Eligibility

Be aware that transferring your property and retaining a life estate can trigger a Medicaid ineligibility 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, a senior who can no longer live in his home might sell it 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, so check with your attorney.

If you want comfort knowing exactly what will happen to your home upon your death, a life estate may be a great option. An elder law attorney can help you find out if a life estate is appropriate for your situation. Then a legal strategy is necessary to transfer property while qualifying for Medicaid benefits.

The Elder Law attorneys at Mandelbaum Barrett PC are here to discuss if a life estate is the right plan for you.