In our long-term care planning, from time-to-time we may recommend that our client give away their property but retain a “life estate.” Or we may suggest that a family member sell a “life estate” to another family member.
Buying and selling a life estate, or retaining a life estate, may seem like odd concepts. What does a life estate mean? How do you buy or sell a life estate? What happens to the life estate when its owner dies?
1. A Law Dictionary Definition
“life estate” n. the right to use or occupy real property for one's life. Often this is given to a person (such as a family member) by deed or as a gift under a will with the idea that a younger person would then take the property upon the death of the one who receives the life estate. Title may also return to the person giving or deeding the property or to his/her surviving children or descendants upon the death of the life tenant. This is called “reversion.”
Example of creation of a life estate: “I grant to my mother, Molly McCree, the right to live in and/or receive rents from my real property, until her death,” or “I give my daughter, Sadie Hawkins, my real property, subject to a life estate to my mother, Molly McCree.” This means a woman’s mother, Molly, gets to live in the house until she dies, then the woman’s daughter, Sadie, will own the property.
2. You Don’t Own Your Property
Most real estate ownership is held as a “fee simple interest.” To lawyers, “owning” property actually means you hold right, title, or possession of an interest or interests in property. In other words, you own a bundle of rights in the property; you don’t own the property itself.
For example, you may think you “own” your house and lot in a suburban subdivision. Think again! Can you demolish the house and erect, say, a convenience market on it? Doubtful: you hold many interests in the property, but you don’t own the right to build anything you want on it. The property is subject to zoning laws; zoning rights are owned by the government.
3. A Life Estate Is an “Interest in Property”
An individual who holds a fee simple interest in property has the right to live on the property for his lifetime. This is called a life estate; the owner of the life estate is called the “life tenant.” When the individual-life tenant dies, his life estate ends and his estate now owns what is called the “remainder,” and final disposition of the remainder is subject to the terms of the individual’s will; or, if there is no will, to whom the law says the property goes.
The individual’s life estate is an interest in real property. The individual’s remainder is also an interest in real property. As can be seen from the first example above, sometimes one person can own the life estate and another person own the remainder interest. In other words, interests in real property can be “divided” or “split.”
If you own the life estate interest—you are the life tenant—you retain the right to live on your property, and you continue to be responsible for all routine expenses--maintenance fees and upkeep, insurance, property taxes, repairs, etc.
If you also own the remainder interest, you have a right to bequeath the remainder interest by the terms of your will; or you can sell or give away the remainder interest during your lifetime.
This lesson about interests in real property allows us to make this very important point: a divided or split interest in real property can be bought and sold. That means that a dollar amount often can be placed on a split interest.
For example, the value of a life estate interest owned by a healthy six year-old female is much greater than for an 88 year-old male. In fact, the federal government publishes a table that tells us what those values are.
So, if you know the value of the fee simple interest, you can calculate the value of the life estate and remainder interests by consulting the table, which is based on the age of the life tenant—in short, the life expectancy of the life tenant.
The value of the life estate interest is never zero. The reason is that everyone, no matter how old or how sick, has a life expectancy. The second before the life tenant dies, the life estate interest has a value. Immediately upon the life tenant’s death, the life estate interest vanishes. It has no value.
4. Death of the Life Tenant
What happens to the life estate interest on the death of the life tenant? That depends on what the deed or other legal instrument that split the property interests says.
In the example above—“I give my daughter, Sadie Hawkins, my real property, subject to a life estate to my mother, Molly McCree”—means that Sadie owns the remainder interest and Molly is the life tenant. When Molly dies, the split interests—life estate and remainder—reunite in one person: Sadie, who now owns the life estate and the remainder.
The Certified Elder Law Attorneys at Takacs McGinnis Elder Care Law may be able to help. Just give us a call at 615.824.2571.