Estate planning is complicated and there are many ways you can protect your assets after your death. One way is to establish a life estate for the person you want to live there for their lifetime. A remainderman is a beneficiary in a life estate who will inherit property after the life tenant’s death. There can be more than one remainderman if you divide the property. Here’s how it works. Consider working with a financial advisor as you create or modify an estate plan.
What Is a Remainderman?
A remainderman, a term used in estate and property law, is the person who will inherit property after a life estate is dissolved. A life estate is usually a residence that a person owns for the duration of their life. At the end of their life, the life estate is dissolved and the remainderman, another individual, inherits the property. The life estate is a type of joint property ownership where the life tenant owns the property, but it will be inherited by another person when the life tenant dies. That other person may be the original owner who established the life estate or it may be a third party.
Let’s say David was married to Ramona. David had a child when he married Ramona. They had no children of their own. If David wanted to ensure that his child would eventually own the family home in which Ramona resides, he could establish a life estate and Ramona as a life tenant. Then, he could name his child as the eventual beneficiary, after Ramona dies, otherwise called the remainderman.
What Is Remainder Interest?
The remainderman has an interest in the property and will become its owner at some time in the future. This is called remainder interest. The remainder interest is the value of the property or a portion of the value inherited by the remainderman upon the death of another heir. A remainder interest is established by a deed, trust or will when the life estate is created. Using the example above, the remainder interest would be held by David’s child.
What Are the Rights of a Remainderman?
The remainderman can exercise a right to own the property only upon the death of a life tenant. As long as the life tenant survives the remainderman has no right to the property. They do, however, have the right to expect that the life tenant will maintain the property in a good fashion, pay the property taxes and homeowner’s insurance premiums.
They also have the right to stop any sale of the property or any encumbrance of the property such as a home equity loan. The life tenant may sell the property, or encumber it, with the remainderman’s consent. The remainderman would be entitled to a portion of the proceeds in the case of a sale.
Why Establish a Life Estate?
Life estates are established to provide for the welfare of another person, the life tenant. The life estate is a kind of joint property ownership where the original owner of the property wants to make sure that the next generation inherits property after the life tenant has died. A life estate ensures that this will happen where just a will cannot.
Under a life estate, the life tenant, who can be removed from a life estate, lives in the property until their death. At that point, the life estate is dissolved and the property is inherited by the remainderman, whoever that may be. While the life tenant survives, they have the rights and responsibilities of a homeowner except they cannot sell or otherwise encumber the property. They must keep the property maintained, property taxes paid and homeowner’s insurance secured. The life tenant also has the tax benefits of homeownership.
The benefit of a life estate is that it is established by a deed instead of a will. Here lies another benefit of a life estate because the home will be excluded from the probate process because the home is no longer an asset of the estate. The transfer of the property upon the death of the life tenant is accomplished by simply filing the death certificate with the county. There is a potential disadvantage to this, however. If the life tenant is receiving any type of social services such as Medicaid, the state may sue to pay for benefits.
There are other benefits to establishing a life estate. The life tenant may enjoy senior and homestead tax breaks. Also, the remainderman may enjoy capital gains tax benefits if they sell the house since the value of the house is established at the time of the life tenant’s death and not when they purchased it.
There are also some disadvantages to a life estate. The life tenant cannot sell or mortgage the house without the permission of the remainderman. The life tenant is legally vulnerable if the remainderman faces any legal actions. Perhaps most important, a life estate cannot be undone in the face of changing life circumstances.
The Bottom Line
A remainderman is an eventual heir to a life estate. A life estate is an estate planning tool, but not one to be used lightly because it can’t be undone. Another way to accomplish essentially the same thing is to set up an irrevocable trust. The life tenant has many of the same rights and responsibilities as any homeowner, but not all. Some rights have to be shared with the remainderman.
Tips for Estate Planning
- Deciding whether a life estate is right for you and your loved ones can be challenging. That’s where a financial advisor can be 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.
- Use SmartAsset’s life insurance calculator to determine, based on several variables, how much life insurance you need based on your circumstances.
- Do you know how much money you will need to save by the age when you want to retire? You can use SmartAsset’s retirement calculator to determine the amount.
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