By: Robert H. Chesley

July 2008

 

Hundreds of years ago, the English made a distinction in a person’s legal interest in real estate.  If a person owned the property “lock, stock and barrel,” he was said to have a fee simple interest.  A person with a fee simple interest could sell it, tear down buildings on it and build new ones, pass it on to someone of his choosing at his death, etc.

 

On the other hand, a person might have only had the right to property as long as they lived.  This became known as a life estate.  The people to whom the property devolved upon death of the life estate holder were known as remaindermen.  The person with the life estate in the property was known as a life tenant.

 

A life tenant’s interest in real estate is much more restricted than the person having the fee simple interest.  A life tenant cannot sell it (because upon the life tenant’s death, it automatically goes to someone else.)  He cannot mortgage it, without the remaindermen’s consent.  He cannot even tear down a building on it without the remaindermen’s consent.  However, he can live there the rest of his life, and if he rents it out, he can retain the rents as long as he lives.

 

Several decades ago, it became popular to deed real estate to a child and retain the life estate as part of one’s estate planning.  This was especially true of farms.  One reason this became popular was because probate was expensive and this prevented the need for probate.  Later, another reason people started doing this was because the family could protect the real estate from being consumed by nursing home expenses.  The law has changed in this regard, and thus, some of the ability to protect assets from long term care expenses is gone.

 

The following are advantages and disadvantages of using a life estate for estate planning purposes:       

 

Advantages

 

• Avoids time and expense of probate.

 

• Heirs receive favorable income and estate tax treatment (they receive stepped up basis for income tax purposes).

 

• Life tenant retains right to income from property.

 

Disadvantages

 

• If remainder person dies, probate proceedings are required.

 

• If remainder person files bankruptcy, gets divorced, or has judgments or liens filed against him, his interest will be affected.

 

• It will not totally protect real estate from nursing home costs.

 

• If property is sold during life tenant’s lifetime, both life tenant and remainder person must sign deed, and proceeds are allocated between the parties.

 

• Gift of remainder interest does not qualify for annual gift tax exclusion.

 

• Occasionally, the obligation of the life tenant and the remainder person are blurred, e.g. who is to pay for improvements, assessments, repairs, etc.

 

Contact us if you have questions about life estates that are not answered above.

 

Back to Legal Q&A