The use of life estates in real estate got an unusual example recently when Hugh Hefner included such an arrangement for the Playboy Mansion.

The property owner, Playboy Enterprises Inc., is asking $200 million for the famous Los Angeles villa. Whoever buys the 29-room mansion will get such benefits as a wine cellar, home theater, private zoo license, and the home's legendary pool and grotto.

They'll also have to wait until Hefner dies before they can move in.

Judy Dutton, writing for the National Association of Realtors, says the buyer of the Playboy Mansion will have to grant a life estate to Hefner. Under this arrangement, he can continue to live on the property until his death. At that point, ownership of the mansion will transfer to the buyer.

Life estates are typically not used to determine the fate of high-end party pads. But they are a common way for a person to continue using a property and outline who will have an interest in it when they pass away. The process has some benefits, including the ability to sidestep probate or the preparation of a will, but it can also lead to problems if unexpected circumstances arise.

According to Cornell University Law School's Legal Information Institute, the life estate deeds a property to a person for the rest of their life. The document must also stipulate who the property should be transferred to upon this person's death.

A life estate involves both a life tenant and at least one person classified as a remainder. Harry S. Margolis, writing for the Massachusetts elder law firm Margolis & Bloom, says the life tenant can continue to make changes to the property and collect rental income. People named as remainders have an interest in the property, but are not able to take full ownership until the life tenant's death.

The life tenant are obligated to keep the property in good condition. Their responsibilities include making any mortgage and property tax payments, completing any necessary repairs or maintenance, and otherwise avoiding anything that might inhibit a remainder's use of the property.

Since the life tenant's interest in the property lasts only as long as they are alive, they cannot include it in their will. They can sell the property to a third party during their lifetime, but only if everyone identified as a remainder agrees to the transaction.

The Legal Information Institute says this third party would still be obligated to transfer the property to the remainders after the life tenant's death. Margolis says an alternate arrangement could require the remainders to each get a portion of the sale proceeds. The life tenant might end up receiving a very modest sum if they are particularly old, since the division of proceeds involves both interest rates and the age of the life tenant.

The process has benefits and disadvantages for both a life tenant and remainder. In a best case scenario, it is a simple way for a parent to ensure that their children have a claim to their home while still guaranteeing that they will be able to enjoy the property for the rest of their life.

Establishing a life estate arrangement avoids the hassle and expense of going through probate. If a homeowner still holds a title to a property upon their death, a probate court needs to resolve who the beneficiaries will be. A will identifies who the property should be left to, but still requires a probate process rather than the automatic transfer involved in a life estate.

A life estate can also help out the remainders when it comes to filing taxes. Michael Couture, of the Winston Law Group in Somerville, Mass., says a life estate allows a step up in the capital gains tax basis. Since the property remains part of the taxable estate of the deceased, the remainders can avoid the capital gains tax unless they sell it for more than it was worth at the date of the life tenant's death.

The life estate can also help protect the home from a Medicaid lien, which the program can use to recover the costs of long-term health care. However, there is typically a five-year waiting period between the establishment of the life estate and eligibility. Margolis says a lien may still be placed on the property, but the maximum limit is the value of the life estate rather than the value of the entire property.

One potential problem with a life estate is liability. Though the life tenant will continue to hold the right to live in the property as long as they are current with its payments and upkeep, a remainder's interest in the property may be targeted by a lawsuit. For example, a lien may be placed against the life tenant's home if a remainder is sued or fails to pay their taxes.

Dutton says a remainder may also be held liable for legal issues involving the property while the life tenant is living there. If a person is injured on the property or otherwise finds cause to file a lawsuit, a remainder may find themselves included in the proceedings.

A life tenant may see a variety of other parties claiming an interest in the property. If a remainder goes through a divorce or dies before the life tenant, their interest in the property may transfer unexpectedly to another party.

Randy Coleman, an attorney from Jacksonville, Florida, says a life tenant dividing a property's interest among the remainders would ideally result in an equal share for each person. However, he notes how one case he handled involved two out of three remainders dying before the life tenant. As a result, the surviving remainder had a claim to just one-third of the property upon the life tenant's death. The life tenant may have preferred that the whole property be transferred only to the surviving remainder, but this arrangement would have had to involve a will or trust.

In some circumstances, a life estate may affect the value of the property. Dutton says that real estate professionals are estimating that the Playboy Mansion will sell for less than half its asking price, in part because of the life estate condition. Since any buyer who purchases the property will not be able to use it for an unforeseen number of years, they will likely ask for a steep reduction in the sales price as compensation.

Couture says a life tenant will have to file a gift tax return with the Internal Revenue Service if the value of a property's interest left to a remainder exceeds the federal exemption. You will also need to get the cooperation of all remainders if you wish to have an interest in the property returned to you or borrow against the home's value.

Remainders must make sure that the home is being properly maintained. If someone leaves a property to a beneficiary with a life estate allowing this person to stay in the home, there is the possibility that this life tenant will fail to maintain the home's systems, pay the property taxes, or otherwise maintain the value of the property.

When a life tenant allows a property to deteriorate or knowingly causes damage, it is known by the legal term of "waste." A life estate forbids a life tenant from allowing waste to occur, and the remainders can file suit against them to end the arrangement.

A life estate can be a simple and beneficial arrangement, but it can also lead to certain difficulties. A homeowner should consult with a real estate attorney before deciding if a life estate is right for them.