05/27/10: Understanding Life Estates
By Benny L. Kass
Q:My wife and I have owned our house for many years. I am several years older and suspect that she will outlive me. I want to make sure that she will be able to stay in the house for the rest of her life, and have heard about a legal concept called "a life estate". Can you explain how this works?
A:This is a complex – obtuse – area of the law, but here’s a general outline.
First, if you and your wife hold title as tenants by the entirety, on your death, your wife will automatically own the entire property by “operation of law”. No probate will be required.
However, if the property is held as tenants in common, then on your death, your interest will have to go to Probate, and assuming you have a Last Will and Testament, your interest will be distributed pursuant to the instructions contained in that Will. If you do not have a Will – which you should – your half will go to your heirs in accordance with the Laws of Intestacy in the State where your property is located.
Let’s assume that you hold the property as tenants in common. You can, of course, change the way title is held and convey it to you and your wife as tenants by the entirety. However, you may have reasons not to do this – such as for tax purposes. Accordingly, on your death, your wife will continue to own her share of the property (usually this is allocated on a 50-50 basis.
To give your wife a life estate in your half of the property, your Will would provide simply that on your death, your interest will go to your Wife for her life, and on her death, to whomever you select. That person is called the “remainderman”.
But don’t just write “my wife gets a life estate”. You have to consider many issues – all of which should be clearly spelled out in your Will. Here are some basic guidelines regarding life estates.
– real estate taxes: it is the general rule that the life tenant is responsible for paying all property taxes during his/her lifetime;
– ordinary repairs, upkeep and maintenance: these are the responsibility of the life tenant; that person lives in the house and it is her/his obligation to preserve the property;
– improvements: this question comes up often. “I, the life tenant, want to make improvements to the house; who pays for this?” Ordinarily, a life tenant has no right to make permanent improvements to the home. If they are made, without the consent of the remainderman, it is at the expense of the life tenant. However, it is the obligation of the life tenant to make all of the necessary repairs so as to preserve the property;
– home owner insurance: unless specifically spelled out in the Will, the life tenant is responsible only for insuring his/her interest, while the remainderman has the obligation to insure the remainder interest. Sounds complicated and confusing, but the insurance carriers can assist in resolving this.
– can the life tenant move out and rent the property? The law provides that a life tenant is entitled to both the possession and use of the property. Included in this “use” is the right to rent the property to another, and keep the rent money. However, any such rent would be taxable income to the life tenant;
– can the life tenant sell the interest? The answer is yes, but the potential buyer would only get what the seller has – namely an interest that would end when the seller dies.
– what rights does the remainderman have? The courts seem to treat a life estate as they do tenants. The general principles give the life tenant the right to peaceful possession without interference from the remainderman. However, if it appears that the life tenant is not properly maintaining the property, he or she would have the right to inspect and make any necessary repairs. Although this may require court action.
There may be tax consequences of giving a life estate and you have to discuss this with your own tax advisors.
Can a life estate be held as tenants by the entirety? Last year, the DC Court of Appeals said yes. Husband and wife owned property and in 1982 conveyed it to themselves “as tenants by the entirety for the terms of their natural lives, and upon the death of the survivor of them” to X. When the husband died, the wife in l992 recorded a deed conveying 8/9th of the property to herself and 1/9th to her daughter. After the wife died, her Personal Representative and the daughter sold the property to third parties.
X filed suit to evict the third parties. The lower Court ruled in favor of the current property owners, holding that since one cannot hold a life estate as tenants by the entireties, the 1982 deed was void. According to that Court, when husband died, the wife automatically owned the entire house, and the 1992 deed was valid.
The Court of Appeals reversed, making it very clear that life estate’s can be held as tenants by the entirety. So when both husband and wife died, X became the rightful owner of the property by virtue of the 1982 deed. The court sent the case back to the lower court to resolve other legal issues. (Allen v Schultheiss, decided October 1, 2009).
A life estate is an important tool for homeowners who are getting on in age. But it needs careful planning and crafting. Do you want to do this by deed while you are alive, or is it better to create the life estate through your Will. Talk with your attorney and tax advisors about all these issues.
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