Using a Life Estate in Estate Planning
Estate planning provides many diverse options to individuals. One such option is the use of a life estate. A life estate creates the right for an individual to occupy and use property during their lifetime, or the lifetime of another (known as a life estate autrie vie), while being owned by a different individual. The person who has the right to occupy and use the property is called the life tenant. The owner of the property subject to the life estate is called a remainderman. When the life estate terminates, title to the property automatically passes to the remainderman free and clear of the life estate.
For estate planning purposes, an individual may utilize a life estate to provide for their spouse or elderly relative during his or her life while still ensuring that the property will pass to their children or other beneficiary. A life estate allows that to happen. The spouse or elderly relative becomes the life tenant, with a possessory interest in the property, and the child or children become the remainderman, with an interest in owning the property.
When a life estate is created, the life tenant and remainderman both have obligations to the property. A life tenant is required to take reasonable care to preserve and protect the property and a life tenant must prevent waste to the property. Waste occurs when the life tenant destroys, misuses, alters, or neglects the property, harming the remainderman's right to possession or diminishing the value of the land. Waste includes both physical damage and damage to the property’s title. As such, the life tenant is obligated to pay the real estate taxes, make ordinary repairs to the property, and insure their interest in the property. Both the life tenant and the remainderman have an interest in the property that is insurable.
A life tenant may use the life estate for his or her own benefit, keeping all proceeds from such use, but at the same time must exercise reasonable precautions to leave the property intact for the remainderman. A life tenant cannot sell or encumber the property, but they are entitled to rent, farm, or cut timber on the property. It is important to note that any tenant of the property will be required to vacate at the death of the life tenant because the life estate will terminate at that time. A life tenant is not obligated to make extraordinary repairs to the property, nor is the life tenant obligated to insure the remainderman’s interest in the property. As such, both the life tenant and remainderman should have insurance on the property.
A life tenancy can be complicated when there is a mortgage on the property subject to the life estate. Pursuant to Indiana Code, when real property subject to a mortgage is specifically devised, the beneficiary shall take the property subject to the mortgage unless the Last Will and Testament expressly provides otherwise. Unless the decedent expressly states otherwise, both the life tenant and remainderman have an obligation to pay the mortgage remaining on the property. Without instruction from the decedent, a life tenant is obligated to make interest payments on any mortgage encumbering the property, and the remainderman is obligated to pay the principal payments of the mortgage that encumbers the property. If the life tenant of remainderman cannot afford the mortgage, or refuses to pay, the property is at risk of foreclosing.
A life tenant cannot mortgage the property, use it as collateral for a loan, or sell the property without the remainderman’s consent. If the life tenant and remainderman are unable to work together and make decisions, it leaves the life tenant without options if he or she is unable to pay for the mortgage on the property. In the end, the life tenant may lose their tenancy because of the mortgage, the exact opposite of what the decedent wanted for the life tenant.
If an individual is going to utilize a life estate, either through a deed, Last Will and Testament, or Trust, they need to ensure they have discussed all the potential problems with a life estate before including it in their estate planning.
If you have any questions about life estates or estate planning the attorneys at Slotegraaf Niehoff PC are here to help you.