What is a life estate and why do you need life estate coverage?
Leaving a home to heirs that is currently occupied by a family member or someone else is sometimes set up as a life estate for estate planning purposes. To protect the heirs and occupants, here are answers to some common questions.
What is a life estate?
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(s). In many cases, the other owners are heirs.
What responsibilities does the life estate holder have?
The person who holds the life estate, called the life estate tenant, has full control of the property during their lifetime. They have the legal responsibility to maintain the property, as well as the right to use it, rent it out, and make improvements. After death, the property passes to the heir(s), called the remainderman.
Why do people set up life estates?
Life estates are often used to avoid probate and to give a house to children without giving up the ability to live in it. They are also used for Medicaid planning.
Are life estates taxable?
Life estates avoid probate, but they are still included in the taxable estate.
Can the life estate tenant sell or refinance the property?
The life tenant cannot sell or mortgage the property without permission from the remaindermen.
How is property insured during a life tenancy?
If, for example, property was left to adult children in the will, but one spouse still occupies the property as a life tenant, the insurance policy should be written in the spouse’s name. A homeowner’s policy may be issued to the occupant in this situation when the Coverage A amount is at least 80% of the property’s replacement cost. (Coverage A is the portion of homeowners’ insurance coverage that covers the physical dwelling, not the contents or liability.)
How can life estate coverage protect the heirs, as well as the life tenant?
Heirs (remaindermen) should protect themselves with an Additional Insured Residence Premises endorsement. All of the remaindermen should be named in this endorsement. That endorsement will protect the remaindermen from liability, as well as possible damage or loss related to the property itself.
Life estates can be complex, both to establish and to insure. Consult with a knowledgeable attorney who has experience handling life estates. Then, speak with an expert insurance broker/agent to make sure everyone involved is adequately protected with life estate coverage.