A life estate grants a property owner the exclusive right to possess a lifetime financial interest in real property. This means that the owner has the right to use and enjoy the property for the duration of his or her lifetime.
Rights of a Life Estate Holder
The right to occupy, possess, and use the property
The right to renovate the property
The right to initiate and manage a rental property and collect rental income
The right to sell, transfer, or rent interest in the life estate
The ability to use the estate as a charitable tax deduction
A life estate holder also has the right to use the property as collateral in order to obtain a mortgage. A lender’s primary loan approval guidelines typically require that a borrower have equity, something almost all life estate holders have. Consequently, using a life estate as collateral increases a life estate holder’s chances of being approved for the loan.
However, life estate ownership also comes with responsibilities. Life estate holders have a duty to maintain the property, pay taxes, and keep current with H.O.A fees.
A life estate holder may not be negligent, or alter a property in a manner that damages the environment or health of the property. For example, an estate holder may not prevent the natural flow of water. An estate holder may also not be wasteful with the property and its resources. For example, a property owner may not remove or burn valuable fruit, vegetable trees, and/or bushes.
Failure to adhere to basic ownership responsibilities may result in court action.
Life Estate Agreements
Life estates are also used as a tool to protect a family’s financial future. Life estate agreements may dictate the terms of an estate’s transfer and/or division in the event of a life estate holder’s death. It may also provide alternate scenarios for transfer or division based on whether certain conditions occur.
There is no such thing as a standard life estate agreement. The life estate creator has the ability to create any condition, provision, or requirement he or she chooses. Consequently, each life estate is unique.
If a life estate has multiple owners, the duties of each party must be indicated in the estate agreement. The absence of clear provisions in this regard will likely result in a court dividing a life estate’s material expenses between parties. Divisions may be made based on the proportionality of an estate holder’s stake, the age of an estate holder, and an estate holder’s ability to afford such expenses.
Life estates terminate upon the death of the life estate holder. Life estate agreements typically designate an heir, power of attorney, or third party to whom the life estate’s financial interests will pass. This individual is known as a remainderman.
The most common types of heirs are children. In the event that an estate holder does not designate instructions for transfer prior to his or her death, a court generally transfers an estate’s financial interests to his or her children and splits those interests among them.
In the event that no heir is designated, the life estate creator has the ability to create a contingent remainder. A contingent remainder is a provision that alters the transfer of the estate based on certain conditions.
For example, say a life estate was intended to transfer interests to Pam after the death of her mom, Jill, however, Pam dies before Jill. In this case, the life estate creator (Jill) can designate an alternate party.
Conditions For a Life Estate
Life estate creators may create certain conditions for a remainderman.
A restraint against alienation is a restriction on the ability of a remainderman to sell or transfer his or her interest in the property.
A remainder interest refers to an individual with an interest in an estate in the future. Such interest may be held in a trust that can only be accessed after a certain time period has passed, or an age has been reached.
A reversionary interest is the amount a party holds in the ownership of property after a previous estate terminates. In this case, interest is held by the original property owner and will revert back to that owner should a certain event occur. For example, assume a property owner wants his or her land to be used for the specific purpose of developing a public park; the owner can donate land to the local government or to an existing park. The transfer of the land would be conditioned on the fact that the land transfer only be used for a public park. If the city decides not to use the land for the designated purpose of developing a public park the transferring party has the right to recoup his or her transferred land.
Case Law As It Relates to Life Estate
Case Review: King v. Hawley (1952)
The case, King v. Hawley (1952) 113 Cal.2d 534., involved a dispute over a life estate.
A brother died and administrated his estate to his surviving sister, Ida Graves. His will gave Ida the right to sell some, or all, of the estate’s real and personal property at her discretion for her “comfort and support”. However, he stipulated that whatever was left of the estate at the time of Ida’s death should go to a James Woodward King and his heirs.
Ida died less than four years after her brother. Before she did, however, Ida sold all of the estate’s property and disbursed the proceeds. These transactions resulted in the acquisition by defendants Evelyn M. Hawley and G. W. Graves of the estate’s properties. King sued.
King contended that the brother’s initial will had entitled him to the remainder of the estate upon Ida’s death, but that Ida had fraudulently diverted his inheritance to Hawley and Graves. The court agreed that Ida had transferred property without consideration to the wishes of her brother’s will. It ruled in favor of King.
Case Review: Osborne v. Osborne (1954)
The case, Osborne v. Osborne (1954) 42 Cal.2d 358., involved the son of a deceased father bringing legal action to quiet title to real property.
Merinoeth Osborne and his father, Thomas, drew up a deed provision that stated that Merinoeth would receive the real property called Lot 97 upon Thomas’ death. However, when Thomas died, Merinoeth’s stepmother, Louise Osborne, claimed the property belonged to her. Both Merinoeth and Louise filed for a quiet title on Lot 97.
The trial court at first denied the case. However, the appellate court contended that because the deed for Lot 97 stipulated that it would transfer to Merinoeth upon Thomas’ death, Merinoeth had a remainder interest in the property. The court ruled in favor of Merinoeth.