cohen burns hard paul law firm



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West Hartford, CT
(West Hartford Center)
(860) 561-1036

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Collinsville, CT
(Rte 44, near the Shoppes at Canton)
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Estates For Life
By Eric and Suzanne Hard

Introduction: What is a life estate?

A life estate is a form of property right. You can own a life estate in any type of property, but, most commonly, people own life estates in real estate. The owner of a life estate has the right to the use and enjoyment of the property for his or her lifetime. A life estate in property differs from full property ownership (owning property in fee simple absolute), in that the owner of the life estate, or life tenant, can not, among other limitations, mortgage the property, sell the property, or leave (devise) the property to someone else through a will.

When a life estate is created, a remainder interest is also created. The remainder interest is what remains when the life estate ends. The remainder is an absolute form of ownership, including the right to use, mortgage and devise the property.

The owner of the life estate generally is obligated to pay the taxes, insurance and upkeep of the property, unless otherwise arranged by the documents that create the life estate. The estate must be maintained so as to preserve the value of the remainder interest.

How is a life estate created?

A life estate can be established during one’s life time by deeding property to someone while reserving, for oneself or another party, a life estate. This is accomplished through language in the transfer instrument that gives a designated person (or people) the right to use the property for their lifetime. A life estate can also be created by a will; for example, when someone leaves a life estate in property to their spouse, with the remainder going to other heirs, such as one’s children.

How are Life Estates used?

Life estates are often used to avoid probate or to make a contribution to a charity. The first scenario occurs when an older parent wants to retain the value of the family home for the next generation but avoid the expense and trouble of probate. In this case, the parent deeds the property to the adult child, but retains a life estate. The child is the remainderman and the parent, or grantor, becomes the life tenant.

As a life tenant, the parent retains the right to live in the home for his or her lifetime. Upon the parent’s death, the estate fully vests with the child who was deeded the remainder interest. The transfer is accomplished outside the probate process. One consequence is that the parent will no longer own the property. Should the child develop financial troubles, the property will be vulnerable to the child’s creditors. Also, if the child divorces, the property could be subject to alimony or child support orders. On the positive side, the child receives a stepped-up basis in the property equal to the value of the property at that time of the parent’s death. There are tax benefits to this type of transfer, especially if the child will not live in the house, and, thus, can not take advantage of the exemption from capital gains taxes for equity increases in the sale of a homestead.

Consumers should be aware that when a parent transfers his or her home to an adult child and then retains a life estate, upon the death of the parent, the property will be included in the taxable estate, if the estate is large enough to be subject to such taxation.

A different way to avoid probate is to place the property in a revocable living trust. In such a case, the deed to the property is transferred into a trust, with the children as beneficiaries. The trust does not die with the parent and is not subject to probate. Thus, the parent accomplishes the transfer but can maintain control of the property and protect it from the potential creditors of the child.

A life estate can also be used to make a charitable donation. This is called a retained life estate arrangement. The Grantor deeds the property to a charity, and retains a life estate in the transfer document. The charity gets the remainder interest and the Grantor can deduct the value of the remainder interest conveyed from his or her income for tax purposes. The amount of the deduction depends upon the fair market value of the property and the age of the donor. The donor gets to stay in the home for his lifetime, receive a favorable tax deduction, and benefit a charity. Upon the death of the donor, the charity usually sells the property and keeps the proceeds.

Life Estates and Medicaid

Under current Medicaid law, eligibility for benefits is restricted if it is found that assets have been transferred for less than market value in the five years prior to application for benefits. The transfer of a property to a child for no consideration while retaining a life estate is an example of a transfer that may impact Medicaid eligibility. However, in such a case, the amount of the penalty is reduced, because only the value of the remainder interest conveyed -- not the total value of the house -- will be attributed to the applicant. The retained life estate itself is not a resource that Medicaid will consider recoverable.

On February 8, 2006, President Bush signed into law the Deficit Reduction Act of 2005 (Public Law 109-171) (the DRA). One effect of this legislation is to make it more difficult for individuals to obtain Medicaid benefits for long-term health care expenses.

The two most important changes in the law that the average home owner should be aware of are: 1) an increase from three years to five years in the period of time the states must “look back” to determine if there has been an asset transfer made in order to qualify for Medicaid and 2) denial of Medicaid assistance for long-term care to individuals with home equity in excess of $500,000.

In addition, the Deficit Reduction Act specifically addresses the situation of a parent buying a life estate in the home of a child. Under the new Act, such a purchase is not a transfer that will limit the eligibility for Medicaid, provided that the parent actually lives in the house for one year.

Suzanne Hard is a lawyer residing in Avon, CT. Eric Hard is an attorney with the Law Firm of Cohen, Burns, Hard and Paul in West Hartford, CT. Eric and Suzanne may be contacted at, or at 860-561-4961.

Copyright 2006, by Eric Hard and Suzanne Hard. All rights reserved.


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