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LEGAL MATTERS: What Does it Mean to Create a Life Estate?

KcolorBy Kathleen G. Moriarty, Peters & Moriarty,

Attorneys andCounselors of Law

Legal Matters is a regular column intended to address general legal concerns. Since every client walks in the door with a different set of circumstances, you should not rely on this column to provide specific legal advice. If you are in need of specific legal advice, please consult with an attorney; he or she will provide advice that is unique and tailored to your legal needs.

One method of estate planning is to transfer assets into someone else’s name during a person’s lifetime instead of leaving those assets to others through a will, which only takes effect upon the person’s death. This is often done to avoid probate, maximize certain tax benefits, or to protect the assets from the costs of long-term care incurred later in life.

Most commonly, parents will deed their home, or other real property, to children and reserve what’s called a “life use” (or life estate). A life estate is simple and inexpensive to create, requiring only a new deed be recorded. Once the transfer takes place, the life tenant has certain rights and obligations.

The life tenant retains exclusive use of the property; she is not required to “share” the property with the remainderman owner (the legal owner). Unless an agreement exists otherwise, the life tenant is financially responsible for the property — taxes, insurance, utilities, maintenance and repair, and any mortgages in her name. She is also entitled to collect any income, including rent.

The property, under most circumstances, is protected from end-of-life Medicaid claims once five years have passed since the date of transfer (commonly referred to as the “five year look back”).

As with anything, where there are benefits, there are also consequences. The life tenant may be disqualified from certain Medicaid benefits during the five-year look back period and may also give up some of her rights to choose the facility in which she receives care.

Although the legal owner may sell the property, the life tenant must sign the deed, extinguishing her life tenancy, or the new legal owner takes title subject to the existing life use. Upon death of the life tenant, the property automatically transfers to the legal owner. This benefits the legal owner in that the time and expense of a probate proceeding is not required (for this particular asset).

This article is not meant to be an all-inclusive review of the pros and cons of life estates — or estate planning in general. As with any estate planning strategies, you should consult with an attorney to ensure that your plan serves your best legal interest.

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