Does A Person With A Life Estate Own The Property?
A life estate is a type of joint ownership of real property with ownership “split” between a present interest and a remainder interest. The individual holding the life estate – the life tenant retains the legal right to possess and use the property during their lifetime.
The life tenant holds the property “in forma pauperis,” meaning that the life tenant does not own legal title to a fee simple interest in the property. The remainder interest – held by the remainderman – at all times remains sole and undivided legal title to the property.
If there is approximately a 50% life estate, then the remainder will get 25% of the profits from a sale or a sale of part of the property. A 100% life estate would mean the remainder man gets 50% of the profits.
For example, A owns real property with a determinable life estate (e.g., a person). This person has a life estate interest in A’s real property. B has the remainder of interest in the property. The remainderman will get whatever is leftover after the death of A with respect to this real property.
So, if A dies, leaving a 50% life estate to B, then B will get 25% of the profits from any sale or a sale of part of A’s property.
The remainderman is the person who is or will be holding a life estate interest in the property upon death. In general, in Arizona, a life estate interest can be probated upon death.
What is the basis of a life estate? Most lawyers would say that the basis of a life estate is the property itself plus any improvements made to the property, such as buildings, etc. A person who only has a life estate interest in their property wouldn’t owe any tax on it; they would receive no income from it.
All of the income or appreciation is owed to the remainderman with respect to their remainder interest.
Life estate property is subject to Federal Income, Social Security, Medicare, and other property tax. A life estate can be inherited or conveyed by the gift, but it is recognized that a life tenant/life estate holder will be more susceptible to creditors than they would be otherwise.
Life estate interests typically can allow the surviving owner to obtain a new loan at a lower rate than the interest still owed on the mortgage, creating additional financial benefits.
Life estates are more common in Arizona than elsewhere in the country. Life estates are typically used by trusts and corporations. Life estates are less commonly used by individuals since there can be tax consequences for an individual.
Can Someone With A Life Estate Sell The Property?
The life tenant cannot sell, mortgage, transfer or encumber the property. The life tenant can only perform acts necessary to protect the estate. All of the income and appreciation is owed to the remainderman with respect to their interest in the property.
An individual can usually sell their life estate interest if they transfer it through a sale, mortgage, or other conveyance.
If you need to sell your life estate interest, you should find out what your options are because there may be tax implications with respect to a sale versus the sale of other types of property.
Does A Life Estate Have To Be Recorded?
Life estates are inexpensive and straightforward to establish. All that is needed to set up the life estate is for a new deed to be recorded. The property will then formally belong to the life tenant, but only for as long as he or she is alive.
If a life tenant wants to give their interest to someone else at some point, the property will have to be recorded again. However, if a life tenant does not want to give their interest in the property away, it will not have to be recorded.
However, it is recommended that a life estate be recorded in order for the heirs of A to determine what percentage of the lump sum proceeds from a sale they’d receive.
For example, if A owned 100% of the property’s value and only had a life estate interest in the property but never recorded that in the land records, then upon A’s death, the heirs of A will have to prove that they are entitled to a share of the proceeds from any sale of their deceased relative’s interest in A’s property.
However, if A had a life estate interest in the property as well as a remainder interest, and the life estate was recorded in the land records, then A’s heirs will be able to show that they are entitled to a share of the present value of A’s interest in their deceased relative’s property.