Using a Life Estate Deed for Medicaid Planning in Texas

For individuals anticipating the future need for long-term care and Medicaid benefits, a life estate deed can be a valuable planning tool when the potential applicant is living with an adult child. This strategy allows the Medicaid applicant to purchase a life estate interest in their child’s home, giving them the legal right to live in the home for the rest of their life without owning the property outright.

A life estate is created when the child (as the property owner) signs a deed that conveys a life estate interest to the parent. The parent pays fair market value for the life estate based on their life expectancy, using valuation tables published by the Social Security Administration. For example, if a parent is 75 years old, the value of their life estate would typically be around 40–50% of the property’s full value, depending on interest rates and other factors. Because the parent is purchasing the life estate for fair market value—and not receiving it as a gift—this transfer does not violate Medicaid’s five-year look-back rule. It is treated as a legitimate real estate transaction rather than a transfer for less than fair value.

A person who holds a life estate, also known as the “life tenant,” has the right to live in the home for the rest of their life, regardless of who owns the remainder interest. The life tenant also has the right to use and enjoy the home, and, in some cases, may be responsible for maintaining the property and paying their share of taxes or insurance. However, the life tenant cannot sell or mortgage the property without the consent of the remainder owner (in this case, the child). When the life tenant passes away, their life estate automatically terminates, and full ownership of the property passes to the remainder owner—typically the child who granted the life estate. This transfer happens outside of probate, meaning there is no need to include the home in the life tenant’s will or estate administration. The life tenant’s interest does not have any value after death and cannot be inherited or transferred. Because the life estate ends by operation of law, it can be an efficient estate planning tool that avoids court involvement while ensuring the parent had legal housing rights during their lifetime.

To complete the transaction, the child and their spouse (if married) must sign the deed conveying the life estate to the parent. The deed must clearly define the parent’s life estate rights and be properly recorded with the county clerk to be effective. The Medicaid rules state that this life estate can be exempt only if the potential applicant resided in the home for 12 months while having the life estate interest. For that reason, it’s important to complete this strategy as soon as possible.

Purchasing a life estate is an effective strategy for seniors who are living with a child and who want to ensure they retain housing stability while also engaging in Medicaid planning. It preserves the parent’s right to remain in the home and protects the child’s ownership of the property. This approach works best when the parent has liquid assets to invest in the life estate interest and when the living arrangement is likely to continue for the long term.