Granting a Life Estate Instead of Selling: Key Risks Under Montana Law

Short answer: Granting another owner a life estate gives that person the right to possess and use the property for life but creates a future interest for the remainder owner. This shifts control, financing options, tax exposure, and long-term flexibility in ways that can produce significant disputes and financial risk. Below is a plain-language FAQ that explains the main risks in Montana and practical steps to reduce them.

What is a life estate?

A life estate is a property interest that gives someone (the life tenant) the right to possess and use real property for the duration of that person’s life. When the life tenant dies, ownership passes to the remainder holder (the person holding the remainder interest). In Montana, life estates are created by deed or will and must be recorded to affect title and third parties. For Montana statutes and the text of state law you can consult the Montana Code Online: https://leg.mt.gov/bills/mca/.

Major risks of granting a life estate instead of selling

1. Loss of control and marketability

Once you grant a life estate, the life tenant has the right to possess and occupy the property during life. The remainder owner cannot force a sale during the life tenant’s lifetime unless the deed reserves a power to sell or Montana law allows partition in certain co-ownership situations. The presence of a life estate reduces the property’s marketability and makes it harder to refinance or sell because buyers and lenders must evaluate both the life interest and the remainder interest.

2. Financing, refinancing, and mortgage issues

Lenders generally dislike life estates because the life tenant’s sole possession interest complicates foreclosure, repayment, and enforcement. If the property has a mortgage, the life tenant’s use may not relieve the remainder owner from liability on the loan and vice versa. A life estate may block a remainder owner from obtaining conventional financing secured by the entire fee simple estate.

3. Maintenance duties, taxes, and expenses

Who pays property taxes, insurance, and maintenance often becomes a dispute. Absent an express agreement, Montana law and courts look to the parties’ intent and general property principles: the life tenant typically must avoid committing waste and may be responsible for ordinary upkeep and taxes, while major improvements or capital expenses often fall on the remainder holder. Unpaid taxes can create liens that affect both interests.

4. Risk of waste and damage

The life tenant is prohibited from committing “waste” — actions that substantially harm the property (for example, demolishing improvements or removing valuable timber without consent). But proving waste can be expensive and may require litigation. A life tenant who neglects maintenance or allows deterioration can reduce the remainder holder’s value.

5. Creditor claims

Creditors of the life tenant may try to reach the life estate (their remedies are limited to the life tenant’s interest, but this can still affect possession and create liens). Creditors of the remainder holder may also assert claims that affect future enjoyment. Different creditor types and priority rules can produce unexpected outcomes.

6. Probate, estate planning, and Medicaid exposure

Granting a life estate may affect eligibility for public benefits (such as Medicaid long-term care coverage) and the treatment of the property in the life tenant’s estate. States differ on how life estates are treated for Medicaid look-back and transfer rules. Montana follows federal Medicaid rules for eligibility; a transfer of an interest for less than fair market value can trigger penalties. Consult a qualified elder-law attorney or benefits specialist for specific Medicaid planning.

7. Tax consequences

Giving a life estate can change income tax reporting, capital gains basis, and step-up-in-basis rules at death. For example, when the life tenant dies the remainder holder may receive a stepped-up basis only for the portion of the property included in the decedent’s estate. The rules are technical and depend on how the title is structured and who pays what expenses. Talk with a tax advisor about capital gains, basis, and property tax impacts.

8. Unclear or poorly drafted deeds

Ambiguous deed language can create litigation over who has what rights. A deed must clearly say who is the life tenant, who holds the remainder, and any reserved powers (such as a right to sell or collect rents). Without clarity, both parties face extra legal risk.

9. Conflict and litigation risk

Any ongoing co-ownership relationship carries the risk of disagreement: use of property, rental income, repairs, access, or long-term strategy. A life estate fixes possession for the life tenant, but many issues can lead to expensive disputes that drain value.

How to reduce the risks

• Use a carefully drafted, recorded deed prepared or reviewed by a Montana property attorney. Make the life estate terms explicit: possession rights, who pays taxes/insurance/major repairs, and whether the life tenant can lease the property.
• Consider retaining limited powers for the remainder holder (for example, a reserved power to sell with life tenant consent or a buyout formula).
• Draft a written agreement allocating costs, repair obligations, and rent collection. Record any agreement if it affects title or third-party rights.
• Order a title search and consider title insurance that addresses both the life estate and remainder interests.
• Address financing: if mortgage(s) exist, get lender consent in writing; if new financing is needed, expect limits or higher costs.
• Get tax and Medicaid planning advice from a CPA or elder-law attorney before signing. Be clear about transfer rules and potential penalties.
• Plan for dispute resolution: include mediation/arbitration clauses to reduce expensive court battles.
• Consider alternatives: a buyout, partition and sale agreement, sale with life tenancy leaseback, or creating a trust that defines usage and succession more precisely.

Practical steps for Montana property owners

1. Meet with a Montana-licensed real property attorney to discuss your goals and draft a deed that matches them.
2. Get a title report and discuss title insurance options.
3. Negotiate and sign a written expense agreement (taxes, insurance, maintenance).
4. Record the deed at the county clerk and recorder to give public notice.
5. Keep clear records of payments, repairs, and communications about the property to reduce future disputes.

When a life estate might make sense

A life estate can work when the parties trust each other, when the life tenant needs lifetime housing security, or when the remainder holder wants to avoid probate and is willing to accept the limits on control and marketability. It can be efficient for simple family transfers if the deed is carefully drafted and the parties agree on financial responsibilities.

When to avoid a life estate

A life estate is usually a poor choice when you need immediate liquidity, when parties expect the property to be sold or refinanced soon, or when relationships between the owners are strained. If you need clear marketability, a sale or buyout often reduces long-run risk.

Helpful links

• Montana Code Online (search titles and statutes): https://leg.mt.gov/bills/mca/
• Montana Courts (general resources): https://courts.mt.gov/

Disclaimer: I am not a lawyer. This article is educational only and does not constitute legal advice. For advice about your specific situation, consult a Montana-licensed attorney who practices real property law.