In some cases, property ownership is relatively straightforward, such as when someone purchases a home and is the only party named on the deed. However, there can also be circumstances when interest in a property is shared and subject to certain conditions. One way that parties can have a shared interest is through a life estate. While owning property subject to a life estate can have certain benefits, it may also come with certain disadvantages. If you are a California property owner, you will want to know: What is a life estate, and does it make sense for my situation?
What is a Life Estate?
Essentially, a life estate constitutes a shared interest in real estate where one party (the life tenant) has the present right to use or occupy a property, while the other (the remainderman) holds a future ownership interest. This means that while the life tenant is alive, they have the exclusive right to live on the property. They are also ordinarily responsible for maintenance and paying for taxes and insurance. The life tenant can also rent the property and collect rental payments. After the life tenant dies, the remainderman will assume ownership of the property.
This type of interest can be created when an owner has a deed drafted wherein they reserve a life estate interest in the property. The deed may also include the conditions connected to the life estate interest.
Life estates are often used when parents want to leave a property to their children while maintaining some right to its use. For example, a father creates a life estate on his property and names his two children the remaindermen. He can stay in or lease his home for as long as he is alive. When the father passes away, his two children will become the property owners.
Benefits of a Life Estate
Life estates can be beneficial when someone wants to sell or convey ownership interest in their home while continuing to use it as their residence. The arrangement also allows the life estate holder to maintain their exclusive right to occupy the property for life without interference from the remainderman.
A life estate can be advantageous during estate planning. This is because property conveyed in this manner is not considered to be part of the probate estate. One of the most common scenarios is when a senior parent wants to live in their home and make sure their children inherit their property ownership interests without going through the complications of probate. When the parties get along, this arrangement may work to the benefit of everyone involved.
Potential Disadvantages of a Life Estate
There are some aspects of a life estate that can place the life tenant at a disadvantage, however. One drawback is that the life tenant can’t make significant decisions about the property without obtaining permission from the remainderman. This includes taking out a mortgage or selling the property. Further, depending on the timing, having a life estate could interfere with the life tenant’s Medi-Cal eligibility. This is because the Medi-Cal program has a five-year lookback period to review the applicant’s past financial transactions. The creation of a life estate during that reviewed time frame may result in a Medi-Cal recipient being disqualified from receiving program benefits for a certain amount of time.
Another downside is that the life tenant will not be able to end the life estate or change the remainderman without the current remainderman’s permission. Events in the remainderman’s life can also impact life tenants. For instance, if the remainderman gets divorced, files bankruptcy, or a creditor goes after their assets, the life tenant could be placed at financial risk. Further, if the remainderman dies, their interest could pass to an heir that the life tenant did not intend to get the property. If the life tenant has a strained relationship with the new life tenant, getting approval to make decisions about the property may prove to be problematic.
There can be pros and cons to creating a life estate on your property. If you are considering creating a life estate for your California home, you will want to consult with an experienced California real estate attorney beforehand. You and your attorney can review your situation and determine the best options for your circumstances.
Attorney Raffy Boulgourjian is a California real estate attorney with over twenty years of experience representing clients in residential and commercial real estate cases. He has the knowledge and expertise to assist with your unlawful detainer action, landlord-tenant disputes, and all of your other California real estate interests. Contact Mr. Boulgourjian today to schedule a free legal consultation to discuss your California real estate needs.