What to Know
Example: A couple that has owned their house for many years, and want to make sure if one of them passes away that the other will be able to stay in the house for the rest of his/her life.
This is a complex, blurry area of the law, but here's a general outline.
First, if a couple holds title as tenants by the entirety, on one's death, the spouse will automatically own the entire property by "operation of law". No probate will be required. However, if the property is held as "tenants in common", then when one of the spouses dies, their interest will have to go to Probate, and assuming there is a Last Will and Testament, their interest will be distributed pursuant to the instructions contained in that Will. If there is not a Will, one half will go to the heirs in accordance with the Laws of Intestacy in the State where the property is located.
Let's say that they hold the property as tenants in common. They can change the way title is held and convey it to the couple as tenants by the entirety. However, one may have reasons not to do this, such as for tax reasons. Accordingly, on a spouse's death, the other spouse will continue to own their share of the property.
To give your spouse a life estate in your half of the property, your Will would provide simply that on your death, your interest will go to your spouse for their life, and on the spouse's death, to whomever was select. That person is called the "remainderman".
It cannot be written such as "my wife gets a life estate". You have to consider many issues, which should all be clearly spelled out in the Will. Here are some basic guidelines about life estates.
– real estate taxes: it is the general rule that the life tenant is responsible for paying all property taxes during their lifetime.
– ordinary repairs, upkeep and maintenance are the responsibility of the life tenant; that person lives in the house and it is their obligation to preserve the property;
– improvements: Ordinarily, a life tenant has no right to make permanent improvements to the home. If they are made, without the consent of the remainderman, it is at the expense of the life tenant. However, it is the obligation of the life tenant to make all of the needed repairs to preserve the property;
– home owner insurance: unless specifically spelled out in the Will, the life tenant is responsible only for insuring their own interest, while the remainderman has the obligation to insure the remainder interest. Seems complicated and confusing, but the insurance carriers can help in resolving this.
– is it possible for the life tenant move out and rent the property? The law provides that a life tenant is entitled to both the possession and use of the property. Included in this "use" is the right to rent the property, and keep the rent money. However, rent money would be taxable income to the life tenant;
– can the life tenant sell the interest? Yes, but the potential buyer would only get what the seller has, which is namely an interest that would end when the seller dies.
– what rights does the remainderman have? The courts seem to treat a life estate as they do tenants. The general principles give the life tenant the right to "peaceful possession without interference from the remainderman". However, if it appears that the life tenant is not properly maintaining the property, he or she would have the right to inspect and make any necessary repairs. This may require court action.
A life estate is an important tool for homeowners who are entering their elderly years. But it needs careful planning.
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