Life Estates
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What is a life estate?
A life estate is a type of property ownership where two or more people have ownership rights. Ownership rights are divided between a life tenant and a remainderman or remaindermen, if there are more than one. The life tenant is the person who holds the right to possess and use the property for the duration of their life. The remainderman (or remaindermen) is the person (or people) with the right to take possession of the property after the death of the life tenant.
While the life tenant has lifetime use of the property, they cannot leave the property to their heirs. Upon the life tenant’s death, ownership of the property transfers to the remainderman. You can think of the remainderman as the “beneficiary” who receives the property after the death of the life tenant.
Remaindermen have a “future interest.” During the life of the life tenant, the remaindermen do not have a right to use the property.
Generally, the life tenant has full control of the property during their life. The life tenant can use the property, rent the property, improve the property, etc. The life tenant also has responsibilities. For example, the life tenant must maintain the property and cannot damage or devalue the property. The life tenant may also have financial responsibilities, such as mortgage payments, real estate taxes, and utilities.
The life tenant also has limitations. For example, a life tenant cannot outright sell the property, although the life tenant may sell their life interest in the property. This means that the buyer would own and be responsible for the property for the duration of the life tenant’s life. If the life tenant wants to mortgage the property, then all parties (life tenant and remaindermen) must agree to this and sign off on the mortgage.
The measuring life determines the length of the life estate. The measuring life is the person whose death ends the life estate. Usually, the duration of the life estate is tied to the life of the life tenant.
NOTE: there are circumstances where the duration of the life estate can be tied to another measuring life. Sometimes you will hear the legal term, “rule against perpetuities,” in this context. The rule against perpetuities voids a property interest unless it occurs within a specified period (usually 21 years after the death of an identified person). The rule against perpetuities is a complex topic and is not addressed by this article.
Life estates can be created through deeds, wills, and trusts. This article only addresses life estate deeds.
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Read the case: Berrett v. Standard Fire Ins. Co., 166 Md.App. 321 (Court of Special Appeals 2005)
Read the law: Md. Code, Real Property § 14-102
Life Estate Deeds
A deed is the written document that transfers title (or ownership) of a property from one person to another person. There are several ways to give others certain rights to your property, and the life estate deed is one of those options. A life estate deed is the legal document used to establish a life estate. The deed transfers ownership to the remainderman while allowing the life tenant to retain possession and use of the property for life. This legal document must be recorded with the Land Records in the Circuit Court of the county where the property is located.
The exact words used in the life estate deed are very important as the specific language of the deed can have significant results. For example, you can call a document a life estate deed, but if the language contained in the deed creates property interests that are in conflict with a life estate deed, then you may not have conveyed a life estate.
Be very careful about the wording of the deed. If you can, get help from an experienced attorney so that you can ensure that your deed accomplishes what you would like it to accomplish.
Read the law: Md. Code, Real Property § 4-105, § 4-202
Potential Benefits and Risks
Whether you should move forward with a life estate deed depends on the specific facts and circumstances of your situation. There are potential benefits, but there are also risks and considerations to keep in mind..
Potential Benefits:
- Avoidance of Probate: a life estate allows the property to pass directly to the remainderman without going through probate, which can save time and reduce legal expenses.
- Medicaid Planning: a life estate can sometimes help protect the property from being counted as an asset for Medicaid purposes, although the rules around this are complex and subject to a five-year look-back period
- Control and Security: a life estate deed may allow you to stay in your home while making sure your home passes along to the people you would like it to go to.
Potential Risks
- Loss of Full Control: Once a life estate is established, the life tenant cannot revoke it or change the remainderman without their consent. Additionally, selling or mortgaging the property requires agreement from both the life tenant and the remainderman.
- Potential for Conflict: Life tenants and remaindermen may have different goals. For instance, the life tenant may want to maximize short-term benefits (such as renting the property), while the remainderman may prioritize long-term property preservation. There may also be differences in what appropriate property maintenance looks like and what is waste. Consider your relationship with potential remaindermen, and whether you think can work cooperatively with them.
- Tax Consequences: Creating a life estate can trigger tax consequences, particularly with regard to capital gains tax for the remainderman. The property may also be subject to estate recovery by Medicaid after the life tenant's death.
Termination
Generally, the life estate terminates on the death of life tenant, assuming that the life tenant is the measuring life. However, there may be other situations where a life estate may terminate. Life estates can also terminate under the following circumstances:
- Agreement: If the life tenant and the remainderman agree, they can terminate the life estate by selling the property or merging their interests.
- Foreclosure: A life estate does not protect the property from foreclosure if there is an outstanding mortgage or unpaid property taxes.
- Surrender: The life tenant may voluntarily relinquish their rights to the property, with the consent of the remainderman, effectively terminating the life estate.
If you are seeking to terminate a life estate, consult with an attorney.
Read the case: Berrett v. Standard Fire Ins. Co., 166 Md.App. 321 (Court of Special Appeals 2005)