Life income is the legal right to receive all the earnings a specific asset produces for as long as you live, without owning the asset itself. Someone else, usually named in a will, trust, or deed, will inherit the asset when you die. In the meantime, the dividends, interest, rent, or annuity payments belong to you. The structure shows up most often in estate planning, and the tax, valuation, and eligibility rules that surround it are meaningfully more complex than the basic idea suggests.
Where Life Income Comes From
A life income interest is created by a legal document that separates current earnings from ultimate ownership. Three vehicles do most of the work.
A life estate is recorded in a deed. It gives you the right to live in a property or collect rent from it for the rest of your life, while a named remainderman holds the future ownership. You cannot sell the property on your own; the remainderman cannot evict you.
A charitable remainder trust is an irrevocable trust that pays you (or another named beneficiary) income for life, or for a set term of up to 20 years, and then distributes whatever remains to a charity.1Internal Revenue Service. Charitable Remainder Trusts
A commercial annuity from an insurance company can produce life income under a “life only” payout. Variations include joint-and-survivor annuities that continue for a spouse, and life-with-period-certain annuities that keep paying a beneficiary if you die within a guaranteed window. Fixed annuities lock in a rate; variable and indexed annuities tie returns to market performance.
In every case, only the yield belongs to you. The bonds, shares, land, or annuity contract itself stays with the principal.
What Counts as Income and How Much You Receive
Typical sources include interest from bonds, Treasury securities, and CDs; dividends from stocks; and net rental income from real property. Rental income is net because operating costs, property taxes, insurance, and routine repairs come out first.
The governing document controls how the payment amount is calculated. Two models dominate.
Net Income Method
Under a traditional income trust, the trustee pays out what the assets actually earn, minus administrative expenses. Every receipt has to be sorted into income (distributable to you) or principal (preserved for the remainderman). Payments rise and fall with market conditions, so a year of low rates and modest dividends means a smaller check.
Unitrust Method
A unitrust pays a fixed percentage of the trust’s total value, recalculated each year. For a charitable remainder unitrust, IRC Section 664 requires a payout of at least 5% and no more than 50% of the trust’s net fair market value.2Office of the Law Revision Counsel. 26 USC 664 – Charitable Remainder Trusts Most sit between 5% and 6%. The trustee can invest for total return rather than chase yield, because the payout formula doesn’t depend on what the portfolio earns in any single year.
How Life Income Is Taxed
The IRS treats each type of arrangement differently, and the differences matter.
Trust and Estate Distributions
When a trust or estate pays you income, it reports your share on Schedule K-1 (Form 1041), which flows to your personal return.3Internal Revenue Service. Instructions for Schedule K-1 (Form 1041) for a Beneficiary Filing Form 1040 or 1040-SR (2025) The distribution is generally taxed as ordinary income at your personal rate, running from 10% to 37% for 2026.
Distributable net income (DNI) under IRC Section 643 caps the taxable amount that can be shifted to you.4Office of the Law Revision Counsel. 26 USC 643 – Definitions Applicable to Subparts A, B, C, and D Anything distributed beyond DNI is treated as a tax-free distribution of principal. Trusts that retain income are taxed at compressed rates that hit the top 37% bracket once income exceeds roughly $16,000 in 2026, which is why distributing to a beneficiary in a lower bracket usually produces the better result overall.
Charitable Remainder Trust Distributions
CRT payments follow a four-tier ordering. Each distribution is treated first as ordinary income (to the extent the trust has current and accumulated ordinary income), then as capital gains, then as other income including tax-exempt income, and finally as a tax-free return of principal.1Internal Revenue Service. Charitable Remainder Trusts You do not get to pick the most favorable tier.
Annuity Payments
Annuity payments are split into a taxable portion and a tax-free return of your original investment under an “exclusion ratio” set by IRC Section 72.5eCFR. 26 CFR 1.72-4 – Exclusion Ratio Once you have recovered your entire investment, every later payment is fully taxable.
The 3.8% Net Investment Income Tax
A 3.8% surtax can sit on top of regular income tax. For estates and trusts, it applies to the lesser of undistributed net investment income or the excess of adjusted gross income above the threshold at which the top bracket begins, roughly $16,000 in 2026.6Internal Revenue Service. Topic No. 559, Net Investment Income Tax Individual beneficiaries face the same 3.8% surtax, but the thresholds are much higher: $200,000 for single filers and $250,000 for married couples filing jointly.
Your Obligations as the Income Holder
Holding a life income interest is not a passive role, especially with real property. As the life tenant, you have a duty to preserve the asset. That means paying property taxes, keeping buildings in reasonable repair, and not letting the property deteriorate through neglect. If you let a rental property fall apart or strip timber off the land, a court can step in. Remedies vary by state and can include injunctions, monetary damages (sometimes tripled for willful destruction), and in extreme cases forfeiture of the life estate.
If the Property Is Sold Before You Die
You and the remainderman can agree to sell the property early, and if you do, the proceeds get split. The IRS uses actuarial tables and the Section 7520 interest rate to calculate the present value of your income interest versus the remainderman’s future ownership interest.7Internal Revenue Service. Actuarial Tables A younger life tenant gets a larger share because the income interest is expected to last longer. As of early 2026, the Section 7520 rate sits in the range of 4.6% to 4.8%.8Internal Revenue Service. Section 7520 Interest Rates
Creating a Life Interest Triggers a Gift
If you deed your house to your children and reserve a life estate for yourself, you have made a gift of the remainder interest. Its value is calculated with IRS actuarial tables and the Section 7520 rate. You report the transfer on Form 709, the federal gift tax return.9Internal Revenue Service. 2025 Instructions for Form 709 – United States Gift (and Generation-Skipping Transfer) Tax Return
A remainder interest is a “future interest,” which means it cannot be sheltered by the annual gift tax exclusion ($19,000 per recipient in 2026).10Internal Revenue Service. What’s New – Estate and Gift Tax The full value counts against your $15,000,000 lifetime gift and estate tax exemption for 2026. Most people won’t owe gift tax out of pocket, but the return still has to be filed.
Medicaid Look-Back Consequences
Life estates are used in Medicaid planning, but they can backfire. When you apply for Medicaid coverage of long-term care, the agency reviews all asset transfers made in the 60 months before your application. If the value of what you retained (the income interest) is less than the fair market value of what you gave up (the remainder), Medicaid can treat the difference as an uncompensated transfer. The penalty is a period of ineligibility calculated by dividing the uncompensated amount by the average monthly cost of nursing home care in your state.
Transfers made more than 60 months before you apply are not penalized. A few exceptions allow penalty-free home transfers regardless of timing: transfers to a spouse, to a child under 21, to a permanently disabled child, to a sibling who co-owns the home and lived there for at least a year before your nursing home admission, or to an adult child who lived in the home and served as your caregiver for at least two years before you moved to a facility.
Rental income from a life estate also counts toward Medicaid income eligibility. The interaction with asset limits and look-back rules is state-specific, and getting legal advice before making any transfer is worth the cost.
What Eats Into the Payment
A life income arrangement has ongoing costs that reduce what actually reaches you. A corporate trustee typically charges 1% to 2% of asset value each year, with smaller trusts paying toward the higher end. Roughly half of that fee is charged against income (reducing your payout) and half against principal (reducing the remainderman’s eventual inheritance).
Add tax preparation for the trust’s own Form 1041, investment advisory fees, legal fees for any court accountings, and for real estate held in trust, insurance, maintenance, and property taxes. A 5% unitrust with 1.5% in total expenses delivers an effective 3.5% to the beneficiary. Projecting your income from a life interest without factoring those costs will overstate what you actually receive.