The Life Estate Deed

A life estate is a form of joint ownership, typically associated with real property.  Usually, a life estate is created by filing a deed or Last Will & Testament in the circuit court where the property is located. A life estate has one or more life tenants and one or more remainderman. The life tenants can live in the property, generally, until they die, and then the remaindermen become the exclusive owners of the property. Normally, the life tenant pays for all maintenance, insurance, and taxes on the property while they reside in the property.

Two reasons people choose to utilize this form of ownership are (1) to avoid probate, or (2) to make it easier to qualify for Medicaid at some point in the future. Another reason people use a life estate is to grant one person (maybe a new spouse) life rights to the property and then have the remainder interest go to other people (perhaps children from a prior relationship). Using a life estate deed to avoid probate is less attractive now that Virginia allows a Transfer-on-Death Deed (TODD), which is more flexible. Unlike the life estate deed, the TODD is easily revocable, but it will not assist with Medicaid planning.

Both the TODD and the life estate deed supersede the Last Will & Testament. This means you cannot override either the TODD or life estate deed with provisions in a Last Will & Testament. One of the advantages of the TODD and the life estate deed are that they are recorded with the court and, as such, are far less likely to be lost or destroyed than a Last Will & Testament. Imagine a situation where one of your heirs finds the Last Will, doesn’t like what it says, and “accidently” misplaces it.

A common scenario where a life estate may be used is when there are children from a prior relationship. Imagine you have three children that you want your house to go to when you die, but you want your new spouse to have a place to live until he or she dies. You can grant your new spouse a life estate, where she lives in the house for the remainder of her life, and then, upon her death, your children become the exclusive owners of the house.

However, there can be downsides to life estate deeds. In the scenario where you are transferring the property to your children but withholding life rights to the property, you lose significant control. It will be difficult to sell or mortgage the property with a life estate. It is difficult to alter the deed because it may require the signatures of all remaindermen. If the property is sold while the life tenant is still alive, there could be capital gains taxes owed by the remaindermen. The remaindermen’s creditors may attach liens to the remainderman’s interest in the property.

Life estate deeds can be challenging to alter because it requires the signatures of all remaindermen. You should consider your remainderman’s situation before making them a remainderman. If your remainderman is likely to receive means-tested government benefits, then receiving a remainder interest in your property may disrupt their own eligibility for benefits. If your remainderman has a lot of debt, then their creditors may place liens on his or her remainder interest. This won’t affect the life tenant, but it makes the remainderman’s share an easy target for creditors after the life tenant dies.

If the life tenant goes into a nursing home and the remaindermen need to sell the property while the life tenant is still alive, then the sale proceeds may become a Medicaid countable resource for the life tenant, disrupting her Medicaid benefits. Also, the sale proceeds that go to the remaindermen could be subject to capital gains taxes. To avoid this situation, you may be able to rent the home to cover the cost of the home until the life tenant dies, but any portion of the collected rent amount that goes to the life tenant may be a Medicaid countable resource.

If your primary goal is to reduce your countable resources for future anticipated Medicaid nursing home eligibility, a life estate deed may be worth considering. You should record the life estate deed more than five years before entering the nursing home to avoid the look-back period. If you are fairly certain that the property will not be sold until after your death, then the life estate deed may be the best option. If you believe the property will need to be sold before your death, then a life estate deed may cause unforeseen complications.