Life Estates

Today I wanted to give a brief summary on “Life Estates”, what they are, and some pros and cons.  Under Iowa law, a life estate is a form of property ownership that allows one person (the “life tenant”) to use and occupy real estate for the duration of their life, while ownership automatically passes to another person or persons (the “remaindermen”) upon the life tenant’s death.  Life estates are commonly used in estate planning to allow parents to remain in their home for life while ensuring that the property transfers to children without going through probate.  When the life tenant dies, the transfer occurs by operation of law, typically requiring only an affidavit and updated title records.

While the life tenant has the right to possess and use the property, those rights are not unlimited.  The life tenant is generally responsible for ordinary maintenance, property taxes, and insurance, and may not commit “waste,” meaning actions that substantially damage or reduce the value of the property.  Importantly, the life tenant cannot sell or mortgage the property without the consent of the remaindermen, since each holds a legally recognized interest in the property.

From a tax perspective, a retained life estate can be particularly attractive.  Because the property is typically included in the life tenant’s taxable estate at death, the remaindermen generally receive a step-up in basis to the property’s fair market value as of the life tenant’s date of death.  This can significantly reduce or eliminate capital gains tax if the property is later sold. However, life estates can also affect Medicaid eligibility, creditor rights, and long-term care planning.  Furthermore, once a deed is executed, you cannot “un-do” a life estate deed transfer without the life tenant and the remaindermen (and their spouses!) executing documents transferring back their interests; and the transfer to and back to the grantor are considered gifts (see last Legal Briefs article).  As with most areas of the law, the details matter, and anyone considering a life estate should seek legal advice tailored to their specific goals and circumstances.  While they can be a useful tool, the circumstances are usually fairly limited.

As always, (**disclaimer**) you should always seek legal advice for your specific situation and the issues presented herein are for informational purposes only.