Short summary: Granting the other owner a life estate means they get the right to possess and use the property for the rest of their life while the grantor (or a named remainder person) keeps a future interest. That decision preserves lifetime use for the life tenant but creates lasting legal, tax, financial, and practical risks for both parties. Carefully drafted deeds and agreements, and advice from a Wisconsin real estate or elder‑law attorney and a tax advisor, can reduce many risks.

How a life estate works (basic mechanics)

A life estate splits ownership into two parts:

• Life estate (life tenant): Right to possess, occupy, and collect ordinary income from the property during the named person’s life.
• Remainder interest (remainderman): A future interest that becomes full ownership (fee simple) automatically when the life tenant dies.

In Wisconsin, life estates are created by deed or other conveyance of real property (see Wisconsin statutes on real property, e.g., Chapter 700: Real Property for general rules on deeds and conveyances: https://docs.legis.wisconsin.gov/statutes/statutes/700).

Main risks and practical problems

1. Reduced marketability and value

A life estate prevents an immediate sale of full ownership without the life tenant’s agreement. The remainder interest has lower market value because it is deferred until death. Buyers and lenders typically avoid purchasing remainder interests except in special situations, so converting the remainder to cash is difficult.

2. Responsibility for expenses and upkeep

Unless the deed or a separate written agreement allocates responsibilities, disputes often arise about property taxes, mortgage payments, insurance, utilities, routine maintenance, and major repairs. Common default rules:

• The life tenant generally must not commit “waste” (actions that materially harm the property’s value) and is expected to pay ordinary upkeep and property taxes.
• The remainderman generally must contribute to necessary capital expenses unless the deed specifies otherwise, but enforcing that can require litigation.

3. Mortgage and lender consent

If the property has an outstanding mortgage, the mortgage remains enforceable. Granting a life estate may violate mortgage terms and trigger the lender’s remedies (demand for payment, foreclosure). Lender consent is usually required to avoid default.

4. Limits on selling, refinancing or using property as collateral

A life tenant can usually not unilaterally sell the full fee simple estate; they can only sell their life estate (a limited, less valuable interest). A lender typically will not accept a life estate as security for a standard mortgage, making refinancing or borrowing against the property difficult.

5. Tax consequences

Federal and state income and estate tax consequences can be complex:

• Gift tax: Granting a life estate may be treated as a transfer for less than full value and could be a taxable gift depending on circumstances.
• Capital gains: When the property is later sold after the remainder vests, basis and gain calculations can be complicated. A surviving remainderman who acquires fee simple on the life tenant’s death may get a step‑up in basis for estate tax purposes, but that depends on how the interest was created and who owns what at death.

Consult a tax advisor before creating a life estate.

6. Medicaid and public‑benefit implications

For people who might apply for Medicaid or other public benefits, creating a life estate can be treated as a transfer of assets for less than fair market value. Federal Medicaid rules include a look‑back period (typically 5 years) that can cause a period of ineligibility for long‑term care benefits. Wisconsin’s Medicaid rules and agency policies govern eligibility and estate recovery—consult an elder‑law attorney before using life estates for long‑term care planning.

7. Creditor claims

Creditors of the life tenant may be able to attach the life estate. Creditors of the remainderman may sometimes attach the remainder interest. That creates potential risks that a creditor could force sale or otherwise interfere with interests in the property.

8. Potential for disputes and litigation

Common sources of conflict include whether the life tenant may rent the property, who pays for major repairs or improvements, how proceeds are split if the property is sold by agreement, and what constitutes waste. Vague or informal arrangements commonly lead to costly lawsuits in Wisconsin courts.

9. Difficulty partitioning

A life estate complicates partition. A co‑owner who has only a remainder interest cannot fully occupy or use the property until the life tenant dies. While partition actions exist for co‑owners, courts are limited in forcing a sale when the right of possession is reserved for a life tenant; outcomes vary with the facts.

10. Drafting and recording risks

Poorly worded deeds can unintentionally create different rights (e.g., life estate “to A” vs. life estate “to A for life, remainder to B” vs. tenancy with right of survivorship). Recording the deed correctly and using precise language is essential to avoid unintended results.

Hypothetical examples to illustrate the risks

Example 1 — Sibling lives in house: Alice and Bob co‑own a house. Alice grants Bob a life estate so Bob can live there for life while Alice retains the remainder. Bob stops paying property taxes and makes no major repairs. Alice pursues legal action to compel maintenance and pay taxes; meanwhile taxes pile up and the property value declines. Without clear agreement on tax and repair responsibilities, Alice faces costly litigation and potential loss of value.

Example 2 — Medicaid concern: Carol transfers a life estate to her daughter but keeps no other assets. Within three years, Carol needs nursing‑home care and applies for Medicaid. The life‑estate transfer may be treated as a transfer for less than fair market value during Wisconsin’s look‑back period, potentially creating penalties that delay Medicaid eligibility and create financial hardship.

Example 3 — Mortgage/default: Dan deeds a life estate to Eve but the mortgage requires full owner consent for transfers. The lender declares default and accelerates the loan. Unless the mortgage is paid or the lender agrees, the property faces foreclosure despite the life estate arrangement.

How to reduce risk — recommended steps before creating a life estate

1. Get a current, professional appraisal so you know fair market value.
2. Talk with a Wisconsin real estate attorney to draft the deed and any supplemental agreement that allocates taxes, insurance, repairs, and major improvements in writing.
3. Check the title and record any deed properly. Consider title insurance that covers defects in creation of the life estate.
4. Contact the mortgage lender and get written consent if a mortgage exists. Resolve liens before creating the life estate if possible.
5. Consult an elder‑law attorney if Medicaid or long‑term care could be relevant.
6. Ask a tax advisor about gift, income, and estate tax effects, including basis and potential capital gains consequences.
7. Include dispute‑resolution procedures (mediation/arbitration) and clear obligations for maintenance, taxes, insurance, and utilities in writing.
8. Consider alternatives: selling and splitting proceeds, a buy‑out agreement, joint tenancy with right of survivorship, or a life tenancy with buy‑out provisions that trigger if certain events occur.