Michigan: Risks of Granting a Life Estate Instead of Selling — What You Need to Know

Short answer: Granting another owner a life estate rather than selling the property keeps the ownership split: the life tenant has the right to possess the property for life, and a remainderman (or remaindermen) holds the future interest that takes effect when the life tenant dies. That arrangement can solve some problems but creates several material risks you should understand under Michigan law before proceeding.

How a life estate works in plain language

A life estate is a property interest that gives one person (the life tenant) the right to use and occupy the property during that person’s lifetime. Another person or group (the remainderman) has a future interest that becomes full ownership when the life tenant dies. The life tenant cannot ordinarily sell the entire fee simple title — only their life estate — and the remainderman cannot possess the property until the life estate ends.

Key risks of granting a life estate instead of selling (Michigan-focused)

1. Loss of marketability and difficulty refinancing or selling later.

   Most buyers and lenders want clear fee-simple title. A life estate leaves a split interest that makes sale or mortgage financing complicated. The life tenant can attempt to sell or mortgage only the life estate interest; buyers of a life estate pay much less than fee simple value. Lenders may refuse loans secured only by a life estate.

2. Responsibility for taxes, insurance, maintenance, and repairs is unclear unless documented.

   If you do not put clear written terms in the deed or an agreement, disputes often arise over who pays property taxes, insurance, utilities, and routine or major repairs. If the life tenant fails to pay taxes or mortgage payments, the property could be foreclosed, which would harm the remainderman.

3. Creditors and bankruptcy exposure.

   Creditors of the life tenant may be able to reach the life tenant’s interest in the property. Michigan law allows judgment creditors to place liens and sometimes force sale mechanisms against a debtor’s property interests, which could interfere with the remainderman’s future interest. Similarly, bankruptcy by the life tenant can complicate or diminish the life estate holder’s rights.

4. Failure to account for Medicaid / long‑term care eligibility and transfer penalties.

   Transferring a home into a life estate can be treated as a transfer for less than fair market value by Medicaid. Medicaid eligibility for long‑term care in Michigan uses look‑back rules and may impose penalty periods that delay eligibility. If the life estate was created or changed within the Medicaid look‑back period, the person receiving the remainder interest may trigger penalties. Before making lifetime transfers, talk to an elder‑law attorney or the Michigan Department of Health and Human Services about Medicaid rules: https://www.michigan.gov/mdhhs.

5. Potential for waste and disputes over improvements.

   Michigan follows traditional property rules that prevent the life tenant from committing waste (damaging or depleting the property). But what counts as appropriate maintenance versus impermissible alterations is often disputed. Repeated disagreements can lead to court actions.

6. Estate planning and tax consequences.

   Granting a life estate affects gift, estate, and capital‑gains tax consequences. For example, the donor may have made a taxable gift equal to the value of the remainder interest at the time of transfer (unless an exception applies). The basis of the property for the remainderman and life tenant differs and can affect capital gains when the property is later sold. Consult a tax professional because Michigan does not change federal tax rules; federal tax rules will often apply.

7. Interference with future plans and liquidity.

   A life estate ties the hands of both parties: the life tenant cannot convey full ownership, and the remainderman cannot sell or use the property until the life estate ends (except by agreement). If circumstances change — for example, if the remainderman needs cash — the life estate makes quick resolution harder.

8. Possibility of partition or litigation.

   Different owners with different interests can lead to partition suits or other litigation in Michigan courts if one party seeks to change the arrangement or force sale. The availability and remedy depend on the nature of the interests and the court’s equitable powers. See the Michigan Courts website for general information about property disputes: https://courts.michigan.gov/.

Short hypothetical to illustrate

Two siblings jointly own a house. Instead of selling, Sibling A grants Sibling B a life estate so B can live there until death, with A (or A’s heirs) holding the remainder. Years later, B becomes unable to manage the property and stops paying property taxes. A’s remainder interest is at risk if taxes lead to foreclosure. Separately, B runs into creditor trouble; a judgment creditor attaches B’s life interest. A cannot fully sell or use the property during B’s life. If either side misunderstood their financial responsibilities, the arrangement creates disputes and potential financial loss.

Practical steps to reduce risk

• Use a written deed and a separate written agreement that spells out who pays taxes, mortgage, insurance, utilities, and maintenance.
• Order a current appraisal and title search. Record the deed properly with the county register of deeds so the interest is public.
• Get clear creditor and foreclosure protections in writing if possible, and consider title insurance that addresses split interests.
• Consult an elder‑law attorney if Medicaid or long‑term care might be an issue. Michigan’s Medicaid rules can treat life‑estate transfers as transfers for less than fair market value.
• Talk to a tax advisor about gift, estate, and capital gains tax consequences before drafting the deed.
• Consider alternatives such as a tenancy in common with a buyout agreement, a sale with installment payments, or a life estate combined with a repurchase or buyout clause.

Next steps and where to get help

If you are thinking about granting a life estate in Michigan:

• Speak with a Michigan real‑property or elder‑law attorney who can draft a deed and an agreement tailored to your situation and review tax and Medicaid implications.
• Contact the Michigan Department of Health and Human Services for Medicaid transfer rules: https://www.michigan.gov/mdhhs.
• For general Michigan statutes and legal information, consult the Michigan Legislature site: https://www.legislature.mi.gov.

Disclaimer

This article explains general legal concepts about life estates under Michigan practice and is for informational purposes only. It is not legal advice. Every fact pattern is different. Consult a licensed Michigan attorney before signing deeds or making transfers.

Helpful Hints

• Get everything in writing: deed plus a detailed maintenance/tax/insurance agreement.
• Order a current appraisal so both parties understand present values and tax/gift implications.
• Ask for an indemnity clause requiring the life tenant to keep taxes and mortgage current or reimburse the remainderman for payments made to protect the title.
• Check whether the life tenant’s creditors could attach the life estate interest; consider appropriate protections.
• Talk to a tax advisor about basis and potential gift tax reporting when the life estate is created.
• If long‑term care might be needed, get elder‑law advice about Medicaid look‑back rules before transferring any interest.
• Consider a buy‑out clause or right to purchase the life interest if liquidity is a likely future need.