Property rights must transfer to the living in the event of an owner’s death. You cannot take the ownership rights of a home into the grave with you. However, you can pre-empt the inevitable and determine who gets the home and at what point with a remainderman, which is someone who has the right to inherit property after the original owner’s death.
The most common way to do so is through a will or a beneficiary designation. Some states allow specific properties to be designated to certain individuals in death without pomp and circumstance. In other cases, simply naming a family member in the will to be the sole owner of the family home can save everyone involved the trouble of figuring out how to split and liquidate individual shares of interest in the home’s value.
However, there are other ways of dealing with the bequeathment of property besides assigning a name to a deed for when you die. You could gift the property to a loved one, although that would severely affect your lifetime gift tax exemption limit and, as a result, your estate tax exemption limit. Furthermore, giving your child or grandchild the keys to the home will jeopardize your ability to live in it for the rest of your days.
Other Arrangement Options
Other arrangements include the qualified personal residence trust. This irrevocable trust agreement transfers ownership of a property to a trust, to eventually pass into the hands of a beneficiary while allowing the original owner to continue to live on said property for a certain amount of time.
But even such an arrangement has its specific limits and disadvantages: outliving the terms of the trust means you will no longer own the home you live in and may have to pay rent. Dying too early may void the trust agreement.
So, what do you do if you want the property to avoid probate, cannot gift it outright due to tax liability, do not wish to use a trust, and cannot simply name a designated beneficiary?
Enter the Life Estate
While a qualified personal residence trust transfers ownership to a beneficiary while allowing the grantor to remain on the property for some time, a life estate achieves something similar without using a trust.
A life estate is an agreement between a life tenant (the original owner) and a remainderman (the home beneficiary). The terms are usually simple – the life tenant continues to live in the property until they die, at which point the remainderman becomes the full owner.
The main advantage of a life estate over simply naming your child or grandchild in the will is that this streamlines the inheritance process – the moment you die and your death certificate is signed, the remainderman – your chosen beneficiary – will own the property you transferred under a life estate. However, you must know a few things before entering a life estate.
The Role of the Remainderman
A remainderman is someone with a remainder interest in a property. This is a future interest. In other words, a remainderman stands to inherit a property but cannot actually do anything with this interest in the time being.
This has a few distinct disadvantages or considerations for the remainderman. First and foremost, a remainderman is not an owner. They cannot control how the life tenant manages their property. They cannot demand that a life tenant leave their property.
Depending on the type of life estate being discussed, they can insist that a life tenant take care of the property. Remaindermen have a future interest in a home or property. Still, it is an interest nonetheless – this means that they can hold a life tenant accountable for willfully neglecting their responsibilities towards the upkeep and management of the property.
Furthermore, a life tenant typically cannot sell the property without the remainderman’s consent. This is especially important in cases where the grantor of a life estate is not necessarily the same person as the life tenant.
For example, suppose a dying person leaves the family home in a life estate, naming their surviving spouse as life tenant and their child as remainderman. In that case, the spouse must first ensure that the child is in agreement with their decision to sell the property instead. Depending on the age and life expectancy of the life tenant, the remainderman may even be entitled to a larger portion of the proceeds from the sale.
Expectations of a Remainderman
In general, the expectations for a remainderman are limited. You cannot do much with the property you do not officially own, even if you have a future interest in it. A remainderman may have rights, such as potentially greater interest in the proceeds of the property’s sale or the right for the property not to be damaged. But a remainderman’s role remains limited until they become the full owner of the property upon the life tenant’s death.
These rights are also further limited by a life estate with powers. A life estate with powers completely cuts into a remainderman’s rights and transfers full control over the estate to the life tenant. Under a life estate with powers, a life tenant may encumber or sell the property however they see fit. This includes taking out a mortgage on the property that the remainderman will have to inherit.
Should You Use a Life Estate?
Life estates are more flexible than they seem. While most of them are designed for use with property – especially a primary residence, like the family home – a life estate can also be set up for certain financial investments and monetary instruments.
In this case, the principal of the life estate would pass onto the remainderman after the life tenant’s death, while the life tenant enjoys a steady monthly income (without the right to touch the principal).
Life estates become a useful alternative to trusts and wills in cases where a trust might be too expensive or otherwise encumbered. However, the property owner still wishes to remove it from their estate and probate process.
Choosing the right remainderman is crucial. A remainderman cannot be removed from a life estate without their own consent. This makes a life estate effectively irrevocable. It isn’t like a will, which can be amended through codicils or another will.
Estate planning can be complicated but infinitely rewarding, minimizing your family’s ongoing tax liabilities and maximizing the value of your financial legacy. However, estate plans must be entirely individual. There are many circumstances that alter the viability or usefulness of any given estate planning tool. Careful consideration is needed.
Estate planning professionals at Werner can assist with this decision-making process, with locations in Bakersfield, Encino, Lancaster, and Los Angeles