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How Does a Life Estate Work?

MP900398817Placing the family home into a life estate can be a worthwhile move, since it permits an aging parent or other family member to remain in the house, while allowing heirs to have eventual ownership.

A family had fond memories of their childhood home. After their mother passed away, the father eventually remarried. When the father died, he left his second wife a life estate, which allowed her to remain in the home until she died, when the property would pass to the children. However, the stepmom has started thinking about moving to an assisted-living facility. What happens to the house?

The Spokesman-Review explains how a life estate works in the article “Does a life estate have cash value?”

A life estate is a form of co-ownership. A person’s interest in property is limited to his life, with the property passing to other recipients at his death. The person who holds the life estate is called a life tenant, and those who receive the property at the death of the life tenant are called remaindermen.

The life tenant and the remaindermen both have real interests in the property, but unlike other partnerships or other forms of co-ownership, the life tenant and remaindermen don’t have rights in the property at the same time. Only the life tenant has a current right to possession. The remaindermen’s interest doesn’t become activated, until the death of the life tenant.

A life estate is an actual form of ownership, rather than a right to use. The life tenant—in many cases the parent—“owns” the house until her death. The parent will need to pay the taxes and keep the property in reasonable condition. The life tenant could sell the property, but the buyer would only have rights until she dies. There would be few people who would ever buy the property. No lender would loan mom money against the property, because their interest would go away when the life tenant died.

However, there is a value to a life estate, and upon sale, the life tenant must be compensated for the sale of their interest. Life estates are valued using the age of the life tenant and the present fair market value of the property.

Although life estates typically end when the life tenant (or another specified person) dies, some specify conditions that can trigger termination. These would cause the life estate to be terminated, even though the life tenant is still alive and well. For example, a life estate may terminate, if the life tenant leaves the home for more than six months. The actual life estate document details any conditional limits that define when the life estate terminates.

An experienced estate planning attorney will be able to review the family’s situation and decide whether or not a life estate makes sense for the aging parent or stepparent or the family. The family will also need help preparing and executing any documents relating to the transfer and sale of a home that is placed into a life estate, so it is best to develop a relationship with a trusted estate planning attorney, so that the entire transaction can be handled seamlessly.

Reference: The Spokesman-Review (March 17, 2019) “Does a life estate have cash value?”