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Exterior of a homeLife estates can provide effective means to create joint ownership of property, avoid probate and transfer property after death without incurring gift taxes. Parents commonly use them to bequeath a home to children while allowing them to continue living in the home for the duration of their lives. However, should it become desirable to remove someone from a life estate, it can be very difficult unless proper preparations are made in advance. Consider working with a financial advisor for estate planning.

Life Estate Basics

Life estates allow two or more people to have joint ownership of a property. One person, called the life tenant, has ownership for as long as he or she lives. The other person, called the remainderman, takes possession after the life tenant’s death. Both life tenant and remainderman can be multiple people.

Although the remainderman doesn’t have full possession of the property until the life tenant dies, the remainderman does have an interest in the property. To protest those interests, the life tenant is normally not allowed to take various actions, including selling the property or taking out a mortgage on it, without the remainderman’s consent.

The remainderman also has to agree to any change in the person or persons named as remainderman. If there are more than one remainderman, as may be the case with a couple with multiple children, all the remaindermen would have to agree to removing or changing the names on the life estate.

It can be difficult to obtain the consent of the remainderman for major changes, especially involving the removal of a remainderman’s name. However, sometimes it’s desirable to make a change. For instance, if a remainderman becomes heavily indebted, it’s possible that creditors could pursue the remainderman’s interest in the home should the remainderman fail to repay debts. The possibility of a remainderman’s divorce or bankruptcy could make it desirable to remove or change the names on a life estate.

Because of the irrevocable nature of a typical life estate, planners need to consult with an attorney specializing in estates when setting one up. Also, since different states have different requirements for life estates, the attorney should be familiar with local laws.

Power of Appointment

Senior couple sitting outsideOne way to get around the requirement for the remainderman’s approval is to use a testamentary power of appointment. This is a clause in a will that allows the life tenant to change the person to whom the property will be bequeathed after death. Invoking a power of appointment won’t make the life estate invalid. The life tenant still won’t be able to, for instance, sell the property without the remainderman’s permission.

It does give the life tenant the ability to negotiate with the remainderman from a stronger position, or to change to a more agreeable remainderman. However, it has to be set up in advance.

Nominee Realty Trust

A nominee realty trust is a revocable trust that holds legal title to a piece of real estate. To create one, a property owner files a new deed that transfers ownership to the nominee realty trust. Like life estates created with a will or deed, the trust can specify who will receive property after the owner’s death.

Unlike other types of trusts, the grantor of a nominee realty trust can direct the actions of the trustee. This means the life tenant can tell the trustee to change the name of the remainderman. Similar to the power of appointment, the nominee realty trust has to be set up in advance, when the life estate is first created.

Terminating a Life Tenant

Sometimes a remainderman has an interest in terminating the interest of the life tenant. This is potentially much easier to do than to removing or changing the remainderman. However, the life tenant has to do something to justify the change.

Along with the right to occupy the property during his or her life, the life tenant has the right to receive rents from it and to change or improve the property, as long as the property isn’t diminished in value. The life tenant has responsibilities as well, including paying taxes, maintaining the property and avoiding the placement of any liens on the property.

If the life tenant doesn’t fulfill these responsibilities and causes or allows the property to lose value, the remainderman may be able to have the life tenant’s interest terminated. Any specific life estate may have particular provisions that could expand or limit the responsibilities of the life tenant and the remainderman’s ability to terminate the life estate.

Bottom Line

Young woman in an orchard

Life estates can let people transfer property to heirs while retaining the right to live in the property. They can also help manage taxes, avoid probate and serve other estate planning needs. However, life estates are generally considered irrevocable and require the permission of the remainderman before the life tenant can sell or borrow against the property. Likewise, the remainderman has to agree to any changes in the remainderman. Powers of appointment and nominee realty trusts can avoid this obstacle, but they must be prepared in advance.

Tips on Estate Planning

  • Before entering into a life estate, it’s imperative to have a good understanding of your financial situation. That’s where a financial advisor can be extremely helpful. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • SmartAsset’s Retirement Calculator can help you determine how much money you’ll have for retirement according to your age, income and other factors.

Photo credit: ©iStock.com/Martina Birnbaum, ©iStock.com/monkeybusinessimages, ©iStock.com/lucky-sky

Mark Henricks Mark Henricks has reported on personal finance, investing, retirement, entrepreneurship and other topics for more than 30 years. His freelance byline has appeared on CNBC.com and in The Wall Street Journal, The New York Times, The Washington Post, Kiplinger’s Personal Finance and other leading publications. Mark has written books including, “Not Just A Living: The Complete Guide to Creating a Business That Gives You A Life.” His favorite reporting is the kind that helps ordinary people increase their personal wealth and life satisfaction. A graduate of the University of Texas journalism program, he lives in Austin, Texas. In his spare time he enjoys reading, volunteering, performing in an acoustic music duo, whitewater kayaking, wilderness backpacking and competing in triathlons.
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