A life estate is an interest in property, which allows the party owning the life estate, known as the life tenant, to use and enjoy the property for his or her lifetime. The interest of the life estate tenant terminates immediately upon his or her death, and ownership transfers to the “remainderman” named in the deed or will. Life estates are most commonly set up as estate planning tools in order to avoid probate, or Medicaid planning tools in order to protect an elderly Medicaid patient’s home. To set up a life estate, keep reading for detailed instructions after the jump.

Determine what type of life estate deed is best for your situation and purpose. Some states recognize both traditional and enhanced life estate deeds, which have different legal and tax consequences for both the life tenant and the remainderman. Both deeds obligate the life tenant, during the tenancy, to maintain the property, and pay any property taxes, which become due.

A traditional life estate deed grants the life estate tenant the right to use, occupy, and rent the property, while naming the remainderman as the actual owner of the property. This creates an interest in the property for the remainderman, which may allow him or her to sell or mortgage the property, or his or her creditors to attach a lien to the property. It also takes away the right of the life tenant to sell or mortgage the property and transfers the property to the remainderman upon recording, subjecting the transaction to federal gift taxes.

An enhanced life estate deed, or transfer on death deed, allows the life estate tenant to retain his or her ownership of the property, while naming the remainderman as the owner, only upon the life tenant’s death. This leaves the right to sell and/or mortgage the property with the life tenant, during his or her lifetime. It also transfers the property to the remainderman upon the life tenant’s death as an inheritance rather than a gift. In this case, the transaction is not subject to federal gift tax.

A life estate is an interest in property, which allows the party owning the life estate, known as the life tenant, to use and enjoy the property for his or her lifetime.