Short answer (FAQ style)

Granting the other owner a life estate in the property instead of selling it can solve some immediate problems (it avoids a cash sale and preserves use for the life tenant), but it creates a set of long‑term legal, tax, estate, creditor, and practical risks. In Tennessee, a life estate gives one person the right to possess and use the property for the rest of that person’s life while leaving a future interest (the remainder) to someone else. Because the life tenant and the remainderman have different rights and duties, misunderstandings often lead to disputes that are hard to unwind.

Detailed answer — what a life estate does and the principal risks (Tennessee perspective)

What is a life estate?

A life estate is an ownership arrangement where one person (the life tenant) has the right to possess and use the property for the duration of their life. Another person (the remainderman) holds a future interest and becomes full owner when the life tenant dies. The life estate is usually created by deed and should be recorded in the county where the property is located.

Principal risks and downsides

• Loss of marketability and resale difficulty. A property subject to a life estate is harder to sell for full value. Buyers typically want a property free of third‑party possessory rights. If the life tenant remains in possession, the remainderman cannot market the property free and clear without the life tenant’s agreement.
• Complicated partition or forced sale issues. Co‑owners or remainder holders may eventually seek a partition or sale. Courts can order partition or sale, but the presence of a life tenancy complicates how proceeds are divided and may require valuing life interests and remainder interests — a process that increases litigation cost and delay.
• Maintenance, repairs and obligations can cause conflict. Tennessee case law and common practice treat ordinary maintenance and property taxes as life tenant responsibilities, while major structural repairs and capital improvements are often the remainderman’s concern — but those lines are often disputed. If parties disagree about repairs, the property can fall into disrepair or one party may incur unexpected expense.
• Liens, mortgages and creditor claims. A life estate does not eliminate existing mortgages or liens. Mortgage lenders may require payoff or re‑underwriting. Creditors of the life tenant can sometimes attach the life estate (their remedy typically reaches only the life tenant’s interest), and creditors of the remainderman may reach the remainderman’s future interest. This layered exposure increases complexity and risk.
• Tax and income consequences. The split of ownership may complicate property tax bills, income tax on sale, and basis calculations. Valuing the life interest and remainder for capital‑gains purposes is technical. There may be gift‑tax consequences if the grant is treated as a transfer for less than fair market value. Consult a tax advisor before creating a life estate.
• Medicaid and public‑benefits exposure. Transferring an ownership interest (including a life estate) can be treated as a transfer for less than fair market value by Medicaid purposes and could trigger a penalty period for long‑term care eligibility. Tennessee’s Medicaid program (TennCare) has rules about transfers and estate recovery that can affect whether a life estate helps or hurts long‑term care planning.
• Insurance and liability gaps. Who maintains homeowner’s and liability insurance? If the life tenant lives on the property, they should be insured. Disputes over coverage after an injury or damage can lead to lawsuits between life tenant and remainderman.
• Limited flexibility for the life tenant and remainderman. The life tenant cannot convey full fee simple title that extends beyond their life — they can transfer only the life interest, which ends at death. The remainderman cannot fully possess or mortgage the property until the life tenant dies (unless the life tenant agrees). This restricts borrowing and planning options.
• Valuation and unequal benefits. Life estates require accurate valuation of the life interest and the remainder. If you were considering a sale to equalize distribution among owners, a life estate can leave unequal economic outcomes — one person gets possession for life while another receives delayed ownership.
• Hard to undo. Undoing a life estate requires mutual agreement, surrender by the life tenant, or a court action. That is often as difficult as an initial sale, particularly if the life tenant or remainderman changes their mind.

Practical examples (hypothetical)

Example 1: Two siblings (A and B) own a house as tenants in common. A grants B a life estate so B can live in the house for the rest of B’s life, and A keeps the remainder. B later runs into debt, and a creditor sues. The creditor may be able to reach B’s life interest, complicating A’s future ownership.

Example 2: A (age 70) grants a life estate to B (age 65) instead of selling B’s share. B lives in the house but refuses to pay for a major roof replacement and the house’s condition deteriorates. A (as remainderman) must sue to force repairs or risk losing value in the remainder interest.

Tennessee‑specific procedural points

• Record any deed creating a life estate in the county where the property lies to protect priority of interests.
• Check mortgage documents: a bank may have clauses preventing a transfer of an interest without consent.
• Consider TennCare (Tennessee Medicaid) rules if the life estate is part of long‑term care planning — transfers may trigger penalties. For more information about Tennessee’s Medicaid (TennCare), see https://www.tn.gov/tenncare.html.
• Use the Tennessee Code and county recording offices to confirm local recording or partition procedures: Tennessee’s legislative website is https://www.capitol.tn.gov/ (search for conveyancing, recording, and partition statutes applicable in your county).

Alternatives to granting a life estate

Before granting a life estate, consider other options that may avoid the above risks:

• Sell the interest outright and divide proceeds.
• Buyout: one owner purchases the other’s share for a lump sum or structured payments.
• Enter a written co‑ownership agreement that spells out responsibilities, buy‑sell triggers, and dispute resolution.
• Use a trust or other estate planning device (trusts can offer more flexible control over disposition and better tax planning in some cases).
• Partition by agreement (if co‑owners want an actual division) or a court‑ordered partition as a last resort.

Recommended next steps (practical checklist)

1. Get a current, independent appraisal of the property value.
2. Talk to a Tennessee real‑property attorney to draft a deed and any agreement allocating taxes, insurance, repairs, and utilities.
3. Check the deed and mortgage to see if the mortgage or other liens prevent or complicate the life‑estate transfer.
4. Consult a tax professional about capital‑gains, basis, gift tax and income‑tax consequences.
5. If Medicaid or long‑term care is a concern, consult an elder law attorney about TennCare rules before transferring anything.
6. Record the deed promptly if you proceed, and make sure local property records reflect the new interests.

Helpful hints

• Put agreements in writing: a plain verbal understanding is not enough for long‑term property matters.
• Allocate routine vs. capital expenses explicitly in the deed or an accompanying agreement.
• Consider escrow for major improvements or taxes to avoid disputes.
• Ask your attorney about drafting a buy‑out clause or right of first refusal so the remainderman isn’t stuck with limited options.
• Record everything with the county register of deeds to protect priority and notice to third parties.
• If you want the other owner to have a guaranteed right to live in the home but avoid more permanent transfer issues, discuss lesser alternatives (e.g., a formal lease, long‑term rental agreement, or a trust).