What risks should I know about before granting a co-owner a life estate instead of selling the property?

Short answer: Granting a life estate to the other owner gives that person the right to possess and use the property for their lifetime but leaves you with a remainder interest that carries risks: reduced marketability, potential tax and Medicaid consequences, maintenance and liability concerns, limits on refinancing or borrowing, and the possibility of disputes over waste or expenses. Carefully document terms in a recorded deed and get legal and tax advice before you act. This is not legal advice.

Detailed answer — how a life estate works and the main risks under Nebraska law

A life estate splits ownership into two parts: (1) the life tenant’s right to possess and use the property during that person’s life, and (2) the remainderman’s future interest that becomes full ownership when the life estate ends (usually at the life tenant’s death). Creating a life estate is typically done by deed or other conveyance and should be recorded with the county recorder so third parties and lenders can see the change in title.

Below are the primary risks and practical consequences you should consider in Nebraska before granting a co-owner a life estate instead of selling the property outright.

1. Loss of present marketability and decreased value

When you hold only a remainder interest, the property is not freely marketable. Buyers and lenders generally prefer full, fee-simple title. As a remainderman you cannot force the life tenant to sell the property while the life estate exists without the life tenant’s cooperation.
If you want cash now, a life estate is not an effective substitute for a sale because your economic interest is delayed until the life tenant dies.

2. Limits on partition and forced sale

Co-owners with different kinds of interests (life estate vs. remainder) create complex rights. In many states a remainderman cannot compel partition of the life tenant’s possessory estate while the life tenancy exists. That means you may not be able to force a sale or divide the property during the life tenant’s lifetime.
If a sale becomes necessary, parties may need to negotiate or use court processes that are slow and expensive.

3. Obligations for taxes, insurance, repairs, and maintenance

The life tenant typically has the right to possess and use the property and often bears responsibility for ordinary upkeep, property taxes, and insurance, but the exact allocation can depend on the deed and local law. Disputes commonly arise over who pays what and what counts as ordinary versus capital maintenance.
If the life tenant fails to pay taxes or maintain insurance, liens or risk of loss can harm both the life tenant and the remainderman.

4. Risk of waste and diminished value

“Waste” means damaging or reducing the value of the property. A life tenant may not commit voluntary, permissive, or ameliorative waste. If the life tenant does damage the property, the remainderman may sue to stop waste or seek damages. Litigation can be expensive and uncertain.

5. Lender and title complications — refinancing and mortgage priority

Lenders are often reluctant to make loans secured by property subject to a life estate. If the property has an existing mortgage, the life tenant’s rights may not remove the lender’s security interest. The mortgage and life estate must be handled together; a lender may require the life tenant and remainder holder to sign documents.
Title insurance and sale negotiations will be more complicated when a life estate appears in the chain of title.

6. Tax consequences

Granting a life estate can create gift-tax considerations (you are transferring an interest) and affect basis and capital gains reporting when the property is later sold by the remainderman. These federal and state tax consequences can be significant.
Consult a tax professional about potential gift tax, capital gains, and basis effects before you convert a fee simple into life and remainder interests.

7. Medicaid and public-benefits risks

Transfers to create life estates can be treated as transfers of assets by Medicaid programs for eligibility and estate recovery purposes. That may trigger look-back penalties or estate recovery claims after the life tenant’s death. Rules are fact-specific and depend on timing and intent.

8. Family and creditor claims

Creditors of either party may have claims against the owner’s interest. A life estate may not fully protect the property from some creditor actions, and claims can be complex when interests are split.
Family disagreements commonly arise over access, rent, improvements, or who may live in the property.

9. Drafting and recording errors

Poorly drafted deeds can create ambiguity about who holds what interest, deadlines, or reserved rights. That ambiguity invites litigation and title problems. Always use clear, recorded instruments prepared or reviewed by a qualified attorney.

10. Termination and modification

A life estate generally ends at the life tenant’s death, but the parties can agree to terminate it earlier in writing. Obtaining that consent later can be difficult. You cannot unilaterally revoke a life estate once properly created, except in narrow circumstances or by agreement.

Practical steps to reduce risk if you consider granting a life estate

Get written legal advice from a Nebraska attorney who handles real estate and estate planning. They can prepare a deed that precisely allocates tax obligations, maintenance, insurance, and powers (for example, whether the life tenant may lease the property or make major alterations).
Record the deed with the county recorder immediately so title reflects the new interests.
Consider entering a separate written agreement (co-ownership or escrow agreement) that spells out routine expenses, capital improvements, rent, and dispute resolution (mediation/arbitration).
Consult a tax advisor about gift-tax, income-tax, and capital-gains consequences before creating the life estate.
Ask an elder-law attorney about Medicaid rules and possible look-back penalties if either party might apply for Medicaid benefits in the near future.
Obtain title insurance that insures the remainderman’s interest and clarifies mortgage status and liens.
Include clear anti-waste provisions and remedies in your deed or agreement.
If you want liquidity instead of a delayed remainder, consider alternatives such as a buyout, partition sale (if both agree), a mortgage payoff and sale, or selling your interest to a third party experienced with remainder interests.

Where to find Nebraska law and further information

Nebraska’s laws on property conveyances, recording, and civil procedure (including actions affecting title and partition) are published by the Nebraska Legislature. For general statutory research, start at the Nebraska Legislature’s statutes page: https://nebraskalegislature.gov/laws/statutes.php. Because outcomes depend on precise facts and drafting, review any proposed deed or plan with a Nebraska-licensed attorney.

Helpful hints

Don’t sign a life-estate deed until you understand who pays taxes, insurance, and major repairs.
Record the deed promptly. Unrecorded transfers can create title disputes.
Ask whether the life estate will affect any existing mortgage or require lender approval.
Get an appraisal to understand how a life estate might reduce present value.
Consider mediation language in your agreement to avoid expensive court fights later.
Check Medicaid look-back rules before gifting any property interest if one party may need long-term care benefits.
Keep paperwork: deed, title report, insurance policies, and any co-ownership agreement should be saved and shared with heirs.

Important: This article explains general principles. It does not give legal advice. Speak with a Nebraska-licensed attorney about your specific situation before granting or accepting a life estate.