Parents often use life estates to leave the family home to children while remaining in the house for the rest of their lives. However, sometimes things don’t work out as intended. If and how you may make changes to a life estate, the focus of a recent article “How to Remove Someone from a Life Estate” from Yahoo! Finance. For the life estate to be flexible, specific provisions must be in the document when first created. An experienced estate planning attorney is needed to do this right.
A life estate allows two or more people to own real estate property jointly. One person, referred to as the “life tenant,” has ownership of the property for as long as they live. The other person, called the “remainderman,” takes possession only after the life tenant’s death. Multiple people can be named as life tenants and remainderman. However, the more people involved, the more complicated this arrangement becomes.
The remainderman has an unusual position. They don’t have full possession of the property until the life tenant dies, yet they have an interest in the property. The life tenant is not allowed to do certain things, like take out a mortgage or sell the property, without the remainderman’s consent.
The named remainderman must agree to any changes in any person or persons named additional remaindermen. If there’s more than one, which happens when there’s more than one adult child, for instance, all of the remaindermen must agree before any names on the life estate can be removed or changed.
If one of the remaindermen becomes heavily indebted, has a contentious divorce, or is sued for a considerable sum, they could lose their share of the property to creditors, ex-spouses, or adversaries. In that case, removing the problematic remainderman could protect the home’s value.
Most life estates are irrevocable, and the laws concerning life estates vary by state.
One way to work around the need for remainderman approval is to use a Testamentary Power of Appointment, a clause in a will permitting the life tenant to change the person to whom the property will be left upon death. Invoking the Power of Appointment doesn’t make the life estate invalid, so the tenant is still constrained from selling the property or taking any other actions without permission from the remaindermen.
The testamentary power of appointment does give the life tenant some negotiating muscle but must be included in the documents from the start.
Another trust used in this situation is the Nominee Realty Trust. This is a revocable trust holding legal title to real estate. A property owner files a new deed transferring ownership to the nominee realty trust. The trust specifies who receives the property after the owner’s death. The grantor of the nominee trust can direct the trustee’s actions, so the life tenant has the legal ability to tell the trustee to change the names of the remaindermen. This flexibility may be desirable when the children are problematic. The Nominee Realty Trust has to be set up when the life estate is first established.
There are occasions when the remainderman wants to terminate the life tenant’s interest. Termination is more straightforward than removing or changing the remainderman but requires the life tenant to do something particularly egregious or illegal. The life tenant may have certain rights such as: renting out the property, changing or improving the property—as long as the property is being improved. The life tenant is responsible for paying taxes, maintaining the property, and avoiding any liens being placed on the property.
If the life tenant does not fulfill their responsibilities or allows the property to lose value, it may be possible for the remainderman to have the life tenant’s interest terminated. However, that depends upon the provisions in the life estate. This option should be discussed and planned for when the life estate is created.
Reference: Yahoo! Finance (Dec. 16, 2021) “How to Remove Someone from a Life Estate”