Right of Occupancy vs Life Estate: What’s the Difference?

A life estate, or a lifetime estate, is a form of property ownership wherein one party is given the right of occupancy to the property for the rest of their life in the form of a transferable title (the life tenancy), while another party holds property and gains total control over it once the life tenant passes away (the remainderman). The life tenant cannot sell the property, but they can sell their interest in it.

What Is a Right of Occupancy?

A right of occupancy, on the other hand, usually refers to a personal right of occupancy that cannot be sold or transferred. There may be other conditions attached to either the life estate or the right of occupancy based on the language used in the deed, which can be very flexible. There are no clear legal distinctions between one or the other, and individual life estates or legal agreements constituting a right of occupancy will differ heavily from case-to-case.

One could state that the main difference between the two is that a right of occupancy is generally a personal agreement allowing someone to live in a home for as long as they need to, while a life estate is a right of occupancy that can be transferred or sold (although once the life estate ends, the property reverts to the remainderman or their estate).

What Is a Life Estate?

A life estate is a form of ownership designated through a deed. This specifically outlines the details of the life estate, including the identities of the life tenant and remainderman. A grantor typically sets up a life estate, for themselves or someone else. The language around life estates is flexible enough that any deed specifying that one party retains a lifetime right of occupancy while the other party acts as a remainderman is considered a life estate – a form of joint property ownership.

A situation where a life estate would be applicable would be in the case of a property owner with children from a previous marriage, and a new partner. They may wish to bequeath their home to their children but would like their partner to retain the right to live in the home for as long as they wish, and retain other beneficial use rights, such as the right to receive income from the property. Thus, they set up a life estate naming their partner as the life tenant, and one of their children as the remainderman.

If the life tenant consents, they may forfeit their life tenancy and void the life estate, usually by selling their interest to the remainderman. The value of that interest is based on their age and life expectancy. They can also sell their interest in the life tenancy to someone else, or, depending on the agreement, rent the property out and collect income. If another person buys into the life estate, their right of occupancy is tied to the original tenant’s life.

Even if the new buyer outlives the life tenant, the life estate’s duration is fixed upon one person’s life expectancy. Should that person die, even if they are no longer the tenant, the life estate ends and the property passes onto the remainderman, who can then do with it as they please (including selling the property).

What Does a Life Tenant Own?

A life tenant owns their interest in the property, which allows them to occupy it for as long as they are alive. Depending on the language used in the life estate, this right is transferable. The language used to write up the deed will determine the extent to which a life tenant can flex their right of occupancy.

For example, the grantor can include language in the life estate to make it so that if a life tenant moves out, the tenancy ends. Otherwise, the remainderman may have to buy out the remainder of the life tenant’s interest before they die if both the tenant and the remainderman wish to end the life estate.

The life tenant does not own the property outright, nor will they ever have the right to sell it within the bounds of the life estate. While a remainderman (or anyone inheriting the remainderman’s right to the property) will eventually have full ownership over the property once the life estate ends, the life tenant only ever retains control and right of occupancy.

Some agreements include provisions to allow either the life tenant or the remainderman to rent the property out to a third party, provided the life tenant is living elsewhere, and receives all the proceeds from the rent (as per the definition of beneficial use). This can be useful in times where the life tenant must move someplace else, due to medical reasons, such as a care home or hospice.

The proceeds from the rent could help cover medical expenses or provide an additional income aside from a pension or other benefits. In most cases, the life tenant is also responsible for the upkeep of the property, as well as any associated maintenance and utility fees, and property taxes. A life tenant can also choose to sell their interest in the property.

A life estate may be written to be rendered void if certain conditions aren’t honored, such as the life tenant’s obligation to keep the property in good shape, or even something as specific as their marital status (i.e. if the life tenant remarries, the life estate ends).

Is a Life Estate Right for You?

There are upsides and downsides to setting up a life estate. Most notably, it allows property to pass to the remainderman without probate. However, if the remainderman dies before the life tenant does, it usually goes to their estate, and thereby through probate. You can assign a secondary remainderman (the first remainderman’s heir, for example) to avoid this issue, but this can complicate things.

Examining the situation and weighing your options with a legal professional is necessary. There is no way to determine whether a life estate would suit your estate planning needs, or whether there is an alternative arrangement to consider (not to mention the specific language to be used) without individual legal help.

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