Does A Life Estate Make Sense For An Estate Plan
Life estates have received some attention recently as a way to resolve partial ownership of a property. Like any other estate planning tool it needs to be considered in light of the objectives of the parties involved. A life estate is a form of joint ownership that allows one person to remain in the house until his or her death at which time it passes to the other owner or owners. The person residing in the property is referred to as the “life tenant”. Those who inherit the interest are known as the “remainderman” or “remaindermen.” The property passes directly on death of the life tenant to the remaindermen. Note it is important to establish the rights and duties of each party in the life estate so there is no confusion regarding who is responsible for what aspects of the relationship such as taxes, repairs and so on. Usually it is the life tenant. Also this move should not be done without legal consultation and advice from an estate planning attorney.
Here are some circumstances where life estate/remainderman arrangements might work in the individual case. Note, however, if a current or anticipated mortgage is or could become involved you should inform yourself with the lender and your estate planning attorney whether this would work in your case.
- Adult child has been paying parent’s bills when his parent has insufficient income. Sometimes an adult child with substantial income will assist his parent financially to remain in the home but wants to know that, on his parent’s passing he can recover his investment on the sale of the house. On his parent’s death he has a direct interest as remainderman and the house passes to the child. Note there are other ways to accomplish this objective as well. He could purchase a joint interest in the house either as tenant in common or joint tenant with right of survivorship. Our office also drafts private reverse mortgages which allow the adult child to have a recorded interest in the property which would be satisfied on sale. All of these methods can assist in giving a priority interest against other creditors including potential protection regarding Medicaid estate recovery and, in some cases, Medicaid planning provided there is fair consideration.
- Two individuals live together with no intent to marry. One of them owns the property outright and wants it to be inherited eventually by her children. She wants her partner, however, to have a life interest in the property and then, on his passing, to have the property go directly to her children. This person can, in her Will, direct that a life estate be inherited by her partner and a remainder interest to her children. Note that often partners who do not remarry have the goal of assuring their children do not lose their ability to inherit eventually. This is one strategy to assist in doing this.
- Parent buys a life estate in child’s property. Child owns the property and parent lives there. Parent could buy a life estate in the property which would be considerably less expensive than purchasing the property outright. On parent’s death the property reverts entirely to the child. This strategy could also be used where the child lives there as well with his family and is one consideration for Medicaid planning so long as the parent continues to live there for at least one year.
- Some other facts to know.
- The life tenant can live there, pay the bills, and make decisions regarding the property but cannot sell or mortgage the property without the approval of the remaindermen. It is best to lay out the terms in a written agreement before proceeding.
- If the property is sold during the lifetime of the life tenant the proceeds of the sale are divided between the life tenant and the remaindermen. The value of the life interest for the life tenant decreases over time and is based on actuarial tables.
- The house does not need to go through probate on the death of the life tenant and is inherited directly by the remaindermen. Pennsylvania residents should know, however, that Pennsylvania Inheritance Tax is still due on the value received so an inheritance tax return would still be filed.
Planning using life estate concepts should be considered along with other possibilities and with professional advice from someone like an estate planning attorney.
About the Author Janet Colliton
Esquire, Colliton Law Associates, P.C. Janet Colliton has practiced law for over 38 years, 37 of them in Chester County, Pennsylvania, a suburb of Philadelphia. Her practice, Colliton Law Associates, PC, is limited to elder law, Medicaid, including advice, applications and appeals, and other benefits planning including Veterans benefits, life care and special needs planning, guardianships, retirement, and estate planning and administration.