Introducing the Life Estate

The phrase “life estate” often comes up in discussions of estate and Medicaid planning, but what exactly does it mean? A life estate is a form of joint ownership that allows one person to remain in a house until his or her death when it passes to the other owner. Life estates can be used to avoid probate and to give a house to children without giving up the ability to live in it.  They also can play an important role in Medicaid planning.

The Basics

In a life estate, two or more people each have an ownership interest in a property, but for different periods of time. The person holding the life estate — the life tenant — possesses the property during his or her life. The other owner — the remainderman — has a current ownership interest but cannot take possession until the death of the life estate holder. The life tenant has full control of the property during his or her lifetime and has the legal responsibility to maintain the property as well as the right to use it, rent it out, and make improvements to it.

What Happens at Death of the Life Tenant

When the life tenant dies, the house will not go through probate, since at the life tenant’s death the ownership will pass automatically to the holders of the remainder interest. Because the property is not included in the life tenant’s probate estate, it can avoid Medicaid estate recovery in states that have not expanded the definition of estate recovery to include non-probate assets. Even if the state does place a lien on the property to recoup Medicaid costs, the lien will be for the value of the life estate, not the full value of the property.

What about Taxes?

Although the property will not be included in the probate estate, it will be included in the taxable estate. Depending on the size of the estate and the state’s estate tax threshold, the property may be subject to estate taxation.

What Happens when the Property is Sold?

The life tenant cannot sell or mortgage the property without the agreement of the remaindermen. If the property is sold, the proceeds are divided up between the life tenant and the remaindermen. The shares are determined based on the life tenant’s age at the time — the older the life tenant, the smaller his or her share, and the larger the share of the remaindermen.

What if I Encounter a Listing with a Life Estate?

If you encounter a listing or sale involving a Life Estate, contact me to discuss your options so we can insure your property without any glitches.

The Medicaid Problem

Be aware that transferring your property and retaining a life estate can trigger a Medicaid ineligibility period if you apply for Medicaid within five years of the transfer. Purchasing a life estate should not result in a transfer penalty if you buy a life estate in someone else’s home, pay an appropriate amount for the property and live in the house for more than a year.

For example, an elderly man who can no longer live in his home might sell the home and use the proceeds to buy a home for himself and his son and daughter-in-law, with the father holding a life estate and the younger couple as the remaindermen. Alternatively, the father could purchase a life estate interest in the children’s existing home. Assuming the father lives in the home for more than a year and he paid a fair amount for the life estate, the purchase of the life estate should not be a disqualifying transfer for Medicaid.  Just be aware that there may be some local variations on how this is applied, so check with your attorney.

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SRA Fire Prevention Fee Suspended

On Tuesday, July 25th, 2017, Assembly Bill 398 was signed by California Governor Jerry Brown Suspending the State Responsibility Area (SRA) fire prevention fee through the year 2031. The fire prevention activities, formerly paid for by the SRA fee, will continue but will now be funded by a source other than property owners within the SRA. While property owners within the SRA still remain subject to certain wildfire prevention standards, property owners will no longer be charged the fire prevention fee.


The previous fee of $152.33 per habitable structure went into effect on July 1, 2014, to pay for fire prevention services with the specified SRA The fee had paid for various activities to prevent and suppress fires.


Individuals are still responsible for the payment of any SRA Fees generated before the effective date. The fee suspension takes effect July 1 2017 after which new bills will no longer be generated.


Current Disclosure Source NHD reports will reflect this new information about how this change will impact your transactions.