MSU Extension revises MontGuide fact sheet on life estates

Montana State University Extension has recently revised one of its MontGuide fact sheets relating to how a life estate can be a useful estate planning tool.

According to Joel Schumacher, MSU Extension economics associate specialist, a life estate exists during the life of a specific person, also known as a life tenant. The life tenant keeps the use and the possession of the property held in the life estate for the duration of their life, but another party actually owns the property. That owner is known as the remainderman.

“Although the remainderman is the owner of the property, the remainderman cannot have possession until the life tenant dies,” said MontGuide co-author Marsha Goetting, MSU Extension family economics specialist. “The life tenant has exclusive possession rights to the property, including the right to exclude others from using it.”

Types of families that could benefit from the use of a life estate include:

• Farm and ranch families for ensuring real property passes to specific children, but only after the death of the surviving parent.
• Remarried couples with children from a prior marriage to provide a home for the surviving spouse during their lifetime, while ensuring the home passes to specific children when the second spouse dies.
• Couples who want certain real properties to eventually pass to a charity or nonprofit, but only after the passing of the surviving spouse.
• Parents and their adult children who want to protect a home’s value from costs of a nursing home, assisted living or home care.

For example, a couple signed a quitclaim deed transferring their home to their adult children for $1, an amount less than the market value of the home. The quitclaim deed included a provision saying the parents “retain the right to use and occupy the property during their lifetimes.” This wording sets up a joint life estate for them and makes their children the remaindermen.

Because the children did not pay the market value for the home, the parents have made a gift of the difference between the market value and $1. The transfer of the property by the parents to the children is a gift under Medicaid eligibility rules. If the gift occurs within the five years prior to the parent applying for Medicaid benefits, the parent will be ineligible for Medicaid benefits for a certain number of months or years based on the value of the gifts. Goetting and Schumacher said this is because of the federal five-year look back rule on gifts.

“Before granting or keeping a life estate interest either through your estate plan or by a separate agreement, discuss the legal consequences with an attorney,” Goetting said. “Consider assets, family situation and personal preferences carefully to ensure a life estate fits with your overall estate plan.”

More information about life estates can be found at https://store.msuextension.org/Products/Life-Estate-A-Useful-Estate-Planning-Tool__MT200510HR.aspx. Paper copies are also available at local county and reservation Extension offices.