Perhaps you are in the process of estate planning and are hearing the term life tenant rights.
Curious what this means?
Well, if you’re currently working with an estate planner, the question may come up, “Should I gift my property to my children or spouse for planning purposes?”
In some cases, this makes sense.
In others, it does not.
When clients are considering gifting their property to their children or spouse, one of their primary concerns is that they do not want to lose the ability to live in or use the property after gifting it.
Fortunately, using a life estate deed, you can gain life tenant rights and continue to enjoy the property.
In this blog, we’ll talk about what this means and how it would work if you chose to go this route.
1. What is a life estate?
A life estate is a property that an individual owns and may use for the duration of their lifetime.
The individual who owns the property is called the life tenant.
The life tenant shares ownership of the property with another person(s).
This individual will automatically receive title to the property upon the death of the life tenant.
Life estates are often created by property owners to ensure that the next generation will eventually get the family land without the process of probate, which can often be quite lengthy.
It’s a type of joint property ownership, and under this ownership, the owners have the right to use the property for life.
The life tenant will retain all of their rights and responsibilities except, in many circumstances, the right to sell or mortgage the property.
2. What is the relationship between the life tenant and the remainderman?
As stated above, the life estate is a form of joint property ownership.
The life tenant and the “remainderman” share ownership.
Until the life tenant is deceased, the remainderman cannot take possession of the property.
The life tenant is able to live in the home, but is often not able to sell or mortgage it unless the remainderman is in agreement with that action.
The relationship between a life tenant and the remainderman is established with a deed that states that the occupant(s) of the property is able to live on the property for the rest of their lives.
The deed also names the person who will receive the property after the death of the life tenant.
A life estate is often created as a part of the estate planning process in the United States.
It grants the life tenant ownership of property without having to include it in the will as part of their assets.
As such, the property doesn’t go through the probate process.
This will both save the deceased’s family time and help to avoid the estate tax.
Of course, always be sure to get legal advice from an estate planning attorney before making key decisions.
3. What are life tenant rights?
Life tenant rights are the right to occupy, use, and enjoy the property for as long as they live.
Other than the fact that they cannot sell or transfer the property, a life tenant obtains all the typical rights that a standard owner would.
If they decide they want to sell/transfer the property or obtain a mortgage, then they can do this by working with the remainderman unless their right to sell the property is specifically laid out in the deed.
4. When does the life tenant’s interest in the property end?
Before death, the life tenant is responsible for all costs (i.e., property taxes, insurance, maintenance, etc.).
The life tenant also retains any tax benefits of homeownership while they are still alive.
However, the life tenant’s interest in the property ends at death.
After that, the ownership of the property is transferred to the remainderman.
5. What are the advantages of life estates?
A life estate serves as an estate planning tool
Estate planning is the process of designating who will receive your assets and handle responsibilities after your death.
Doing estate planning properly will ensure that your assets go to the right people after your death.
A life estate bypasses probate
Are you worried that your assets will be hung up in probate for months after you pass?
Creating a life estate can ensure that your assets and estate will pass directly to your beneficiary after your death without having to go through the complicated, expensive, and time-consuming process of probate.
A life estate removes the property from the estate
Life estate effectively removes the property from the estate so that it isn’t an estate asset.
This means that its value cannot be considered in a suit against the estate.
6. What are the disadvantages of life estates?
A life tenant cannot sell their property under a life estate
In many cases, you cannot sell your property once you create a life estate.
However, there are often several instances in which a life tenant may want or need to sell their land.
They may want to simplify their life.
They may need to pay for emergency medical issues and subsequent care.
Unfortunately, unless otherwise stipulated in the deed, the life tenant can only sell the property with the consent of the remainderman.
A life estate limits the life tenant’s flexibility
Overall, a life estate severely limits the life tenant’s flexibility.
If the life tenant desires to make improvements to the property (say in the form of renovations), then they may only be able to do so with the remainderman’s consent.
If the life tenant went to the bank to apply for a home equity line of credit, they would be denied because there is a life estate on the property.
Instead, the bank would need to receive a joint application from both the life tenant and the remainderman.
In many ways, this can be frustrating for the life tenant who has likely owned their property for a significant period and isn’t able to make decisions anymore without working together with the remainderman.
The other important aspect to keep in mind is the relationship that the life tenant and the remainderman have.
If the two have a falling out and aren’t able to agree on how to move forward, then this situation can become incredibly complex.
In fact, they may end up needing to resolve this with lawyers of their own.
7. What are the differences between a life estate and an irrevocable trust?
As you read this information, you may draw some parallels between a life tenant and an irrevocable trust.
An irrevocable trust is a tool used in estate planning that removes assets from the estate of the grantor.
The grantor will relinquish all of the rights to some assets and income and transfer them into a trust.
These assets may be cash, investments, or life insurance policies.
The beneficiary of the trust may be a spouse, the grantor’s children, or a charitable organization.
A life estate is similar in that it is also an irrevocable estate planning tool.
When a life estate deed is established, the life tenant cannot later alter the agreement without the consent of the remainderman.
However, unlike an irrevocable trust, a life estate provides the benefit of residence to the grantor.
An irrevocable trust is often used to reduce a person’s wealth on paper while transferring that wealth to family members.
So, like a life estate scenario, it will remove some of the person’s assets from an estate and eliminate them from the probate process.
A person may use an irrevocable trust if they are vulnerable to lawsuits.
For instance, if you’re a physician and you want to protect your assets by transferring them to a family member in a trust, then that can be a wise course of action.
8. What’s an example of a life estate?
An older couple may consider a life estate arrangement during their estate planning as an alternative to naming a beneficiary in their wills.
This will give them the right to stay in their home for the rest of their life and continue to have responsibility for the property.
Then, when they are both deceased, whoever they have named as remainderman (typically an adult child or children) will automatically take the title of the property without having to go through probate.
Likewise, another common scenario is when someone is widowed.
A widowed homeowner who can no longer live alone may create a life estate agreement with an adult child as the remainderman.
Once this agreement has occurred, the parent and child will co-own the property that the parent (the life tenant) will retain lifetime rights to until their passing.
Once they are deceased, the home will pass into the ownership of the child without any delay.
9. Can someone with a life estate sell the property?
Often a life tenant isn’t able to sell the property or take out a mortgage loan against the property unless the remainderman agrees or the deed otherwise stipulates.
Likewise, the remainderman cannot sell or mortgage the property during the lifetime of the life tenant.
10. How does a life estate deed work?
As mentioned above, the life tenant will retain most of the rights and obligations of property ownership under the life estate deed.
They can live in the home or rent it.
They are also responsible for taxes, insurance, and maintaining the property.
If there are any tax benefits of homeownership, then they will also go to the life tenant as well.
The remainderman is a co-owner of the property, but they do not have the legal rights to live it or use it until the death of the life tenant.
However, once a death certificate has been filed for the life tenant, then the remainderman can take possession.
11. Can you evict a life tenant?
No, for the most part, you cannot evict a life tenant unless you can prove they’ve committed some type of wrong to the property.
We recommend that you consult a local attorney familiar with life estates and life tenant rights so that you can understand the next best steps.
When you meet with your attorney, bring documentation regarding the life estate and the present condition of the property.
Most people choose to create a life estate to avoid the probate court and processes.
These processes are long (at least six months) and complicated for their family members.
If there are any challenges with the inherited estate, then it can sometimes take years to obtain properly.
Life estates also give life tenants rights.
Life tenants retain all the rights that a typical property would outside of selling the property or obtaining a mortgage.
This means that the life tenant will be able to live on the property for the remainder of their life and continue to carry out their typical responsibilities.
It is only after their death that the remainderman will take over.
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Disclaimer: we are not lawyers, accountants or financial advisors and the information in this article is for informational purposes only. This article is based on our own research and experience and we do our best to keep it accurate and up-to-date, but it may contain errors. Please be sure to consult a legal or financial professional before making any investment decisions.