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  • Writer's pictureWendy Crowther

Should Mr. & Mrs. Claus Transfer Their North Pole Compound and Retain a Life Estate?

We don’t ever divulge attorney-client privileged communications, but you’ll never believe who called this week – that’s right, Mr. and Mrs. Claus, as in Santa Claus!

Apparently, Mr. and Mrs. Claus were at a Holiday Cocktail Party with the Heat-Snow Misers.  The discussion turned to whether they should transfer their home(s) into a life estate for estate planning purposes and/or to avoid the 5-year Medicaid look back. Hermey the Elf overheard and threw in his two cents: “Doesn’t that mean your kids own the house and you have to pay them rent?”  The Misers replied, “No, we heard that you transfer it to your kids but you still have control of everything – it’s just something that is on paper.

The Clauses, thinking neither response sounded right, gave us a call and we realized there are many misconceptions about what a life estate is and when it’s most helpful.  The Clauses gave us permission to share their story and provide this Holiday Time PSA on the subject.

So what is a life estate? 

A life estate is created in real property when the owner retains the right to live in the property until death (the owner is called the “life tenant”), but otherwise transfers all of the ownership of the property to other folks, oftentimes the owner’s children (referred to as the “remaindermen”).  The remainder interest passes automatically on the death of the life tenant to the remaindermen.  We say the life estate is then “extinguished”.

To create a “life estate,” the owner of property must change their deed.  In the typical scenario, we will be asked by an owner of real property to change their deed when they intend to stay in their house for the remainder of their lives, but they want to make sure the home transfers to their children without the need for probate.  Sometimes the home is their only real asset, or it has been in the family and they want it to stay in the family seamlessly.  Oftentimes they believe that transferring it will prevent a Medicaid lien – and this is so in certain circumstances, but requires special planning and consideration.

But are the Misers correct?  Is Hermey the Elf correct? 

No.  The life tenant does not have to pay rent to the remaindermen.  However, the life tenant is responsible for all real estate taxes and all upkeep of the home.  Further, the life tenant has no ability to transfer the property, although the life tenant can rent out the property during their lifetime.  The remaindermen do not have actual ownership until the death of the life estate tenant. 

While a life estate deed has many advantages – it is relatively inexpensive to draft and record – it is not ideal for all situations.  For example, if the life tenant needs the equity from the home for any reason, it is no longer fully accessible to the life tenant.  Contact your attorney to determine if a life estate makes sense for you!


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