What are the risks if we grant the other owner a life estate in the property instead of selling it?

Short answer: Granting a life estate gives the other owner the right to possess and use the property for the rest of their life. That decision shifts many practical, financial, tax, and legal risks to both the life tenant and the remainder owner. It can complicate future sales, refinancing, government benefits, and estate planning. This article explains the main risks under Utah law and practical steps you can take.

Detailed Answer

1. Basic mechanics: what a life estate does

A life estate is a conveyance that gives one person (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 (the remainder) passes to the named remainderman automatically. The life tenant and remainderman each hold a legally recognized interest at the same time but with different rights.

2. Possession, control, and ability to sell or mortgage

The life tenant has the right to occupy and use the property during life. They can rent it out and collect rents unless the deed says otherwise.
The remainderman owns a future interest; they generally cannot occupy or use the property while the life tenant is alive, nor can they force a sale simply because they hold the remainder (except through a partition action in some circumstances).
Because both interests appear on title, lenders usually will not make a mortgage loan secured only by a remainder interest. A sale of the whole property typically requires the life tenant’s cooperation or the resolution of their interest.

3. Financial obligations and expense allocation

Unless the deed or a written agreement assigns responsibilities, disputes commonly arise over who pays property taxes, insurance, ordinary repairs, and major capital improvements.

Customary rule: the life tenant pays ordinary costs (property taxes, ordinary repairs, utilities). The remainderman bears expenses for major structural repairs and capital improvements. However, parties can contract otherwise.
If the life tenant fails to pay property taxes or mortgages the property, liens can attach and affect the remainderman’s future interest.

4. Exposure to creditor claims and liabilities

Creditors of the life tenant can sometimes pursue the life estate or liens that impair the property. This can reduce the value available to the remainderman later.
Creditors of the remainderman generally cannot seize the life tenant’s possessory right, but they may attach the remainder interest and seek remedies after the life tenant’s death.

5. Risk of waste and damage

The life tenant must not commit “waste”—that is, they cannot intentionally damage the property or permit neglect that destroys value. But proving waste takes time and expense, and it may not fully restore lost value.

6. Complications with Medicaid and public benefits

Transferring a property interest (including creating a life estate) can affect eligibility for Medicaid and other need-based benefits. State and federal Medicaid rules include look-back periods and transfer rules that can impose penalties if the transfer qualifies as a divestment.

7. Tax consequences

Income taxes: If the life tenant rents the property, they generally report rental income and deductions. The remainder holder may have different tax consequences when the life tenant dies.
Capital gains / basis: The tax basis for the remainderman on eventual sale depends on whether the remainderman receives a step-up in basis at the life tenant’s death. Whether and how the basis adjusts depends on ownership facts and estate tax rules.
Property tax assessments and exemptions (for example, senior or homestead exemptions) may change when ownership structure changes.

8. Title insurance, refinancing, and future sale problems

Title companies will note the life estate when issuing title insurance. Many buyers will not want a property with a life estate because the life tenant’s occupancy and rights complicate sale and financing. A remainderman trying to sell will either need the life tenant’s consent or a court order (which is slow and uncertain).

9. Disagreements and litigation risk

Life estates often spawn disputes—who pays what, who may live there, who can make improvements, and how to handle sale offers. Disputes can result in partition suits, breach-of-agreement claims, or litigation over alleged waste.

10. Estate planning and unintended consequences

Granting a life estate can interfere with other estate plans. A grantor who reserves a life estate or grants one to another person should carefully coordinate deeds with wills, trusts, and beneficiary designations to avoid conflicting distributions.

11. Practical examples (hypotheticals)

Example A: You grant your co-owner a life estate and retain the remainder. The life tenant gets sick and cannot pay property taxes. A tax lien attaches and reduces the remainder’s value. The remainderman must pay to clear the lien.

Example B: You grant a life estate to an elderly co-owner to let them remain. That person later rents the house, collects rent, and spends little on maintenance. When they die, the house needs major repairs, reducing the value the remainderman expected.

12. Utah-specific considerations and where to look in the law

Utah follows standard property principles for life estates (possession for life, future interest for remaindermen). Recording deeds and other instruments affecting real property must follow Utah recording practice to protect notice to third parties. For an overview of Utah statutes on real property and recording, consult the Utah Code and the state legislature website: Utah Code and Legislative Information. For Medicaid and public benefits consequences, consult Utah Department of Health resources and federal Medicaid rules.

Helpful Hints

Get a written deed that clearly states the life estate and any limitations or obligations. Ambiguity breeds disputes.
Record the deed promptly with the county recorder’s office to protect priorities and give notice to third parties.
Use a separate written agreement to allocate taxes, insurance, maintenance, major repairs, and who handles routine management.
Obtain a recent professional appraisal before creating the life estate so all parties understand current value.
Consider using a trust instead of a life estate. A revocable or irrevocable trust can give similar occupancy rights but often offers clearer administration and fewer title complications.
Check Medicaid rules before creating a life estate if the life tenant or transferor may need long-term care benefits soon. Transfers in some look-back periods can trigger penalties.
Talk to a tax advisor about basis, capital gains, and income tax consequences before you act.
Consider a buy-out clause or an agreed sale mechanism so the remainderman can buy out the life tenant’s interest or vice versa on agreed terms.
Request title insurance and a current title report. Title issues often arise when interests split between present and future owners.
If you foresee conflict, include dispute-resolution terms (mediation/arbitration) to avoid costly litigation.

Next steps

If you are considering granting a life estate in Utah, take these steps before you sign any deed:

Talk with a real property attorney licensed in Utah to draft the deed and any side agreements tailored to your goals.
Consult a tax professional about income, gift, and estate tax consequences.
Check Medicaid and public-benefit rules if either party may apply for benefits.
Record the deed and update title insurance.

Disclaimer: This article explains general legal principles and practical considerations. It does not provide legal advice and does not create an attorney-client relationship. For advice about your particular situation under Utah law, consult a licensed Utah attorney.