GREATER MILWAUKEE AREA OFFICES IN …

1 1 Attorney Timothy P. Crawford, CPA, CELA*, CAP** wanted to share this information with you. LIFE ESTATE INTERESTS GREATER MILWAUKEE area OFFICES IN BROOKFIELD, GLENDALE, MILWAUKEE , OAK CREEK & RACINE Your Asset Protection Law Firm 840 Lake Avenue, Suite 200 Racine, WI 53403 (262) 634-6659 E-mail: Website: Life estate - an interest whereby the person possessing the life estate interest may use, reside in, and benefit from a piece of real estate such as receiving rent from the property (whether a residence, commercial property, or vacant land) for a specific person s lifetime (usually the same person s lifetime) Life estate pur autre vie - where the life tenant s interest is not based on his/her life (but based on the lifetime of another person) Life tenant - the person who has the life estate interest Remainderman - the person(s) (or charities) who will be 100% owner(s) of the property after the life estate interest ends (normally when the life tenant dies) 1.

2 How is a life estate interest created? A life estate can be created (a) a deed (b) a will (c) a trust (d) a specific state statute (e) a settlement agreement in a divorce case (or a court order) i. A person might create a life estate interest for him/herself, reserving such interest when signing a deed to transfer property to one or more other persons. ii. A person might state in his/her will or trust that one or more persons are to be given a life estate interest at the testator s/trustor s death. iii. A person might purchase a life estate interest in a piece of real estate. iv. A life estate interest might be created by a state s statute under specific circumstances. (For example, Rhode Island allows a surviving spouse to waive the bequests designated for the surviving spouse and claim a life estate interest in the decedent s real estate.)

3 See 1056 33-25-2) 2 v. A ex-wife (or ex-husband) might be given a life estate interest in the family home (or a vacation home) in a divorce settlement agreement. 2. Why is a life estate used? The benefits of keeping a life estate interest for oneself (a) to be able to reside in the property (if it is residential property) (b) to be able to collect the rent money (if the property is rented out) (c) to be able to farm the land (if it is farmland), or collect a fee (or percentage of crops) if the life tenant allows another person to farm the land (d) to be able to receive the real estate tax benefits that a homeowner of residential real estate qualifies for when residing in the property as one s principal residence (general homestead exemption, senior citizen homestead exemption, senior citizen freeze) (e)

4 To be able to receive some of the sales proceeds if the property is sold during the life tenant s lifetime (and to qualify for the exemption under federal law to exclude up to $250,000 of gain) this can be a detriment if the home is sold and the grantor later enters a nursing home and goes on Medicaid (f) to know that the home will pass at death not subject to one s debts (except that in some states, the states may make a claim against the property if the grantor had received Medicaid benefits) unless the transfer is a fraudulent conveyance A person might grant a life estate interest to another person so that the life tenant can reside in the (a) and allow the owner granting the life estate to ultimately pass the property onto others (after the life tenant s death) Example: Dad remarries after mom s death.

5 He wants to allow his new wife Gail to reside in the home after his death, but have the house ultimately pass to his children from his first marriage. (b) so that the property is not fully subject to the life tenant s debts (lawsuits, nursing home expenses, etc.) (c) so that the property passes without being subject to probate (and without having a title company charge a bond in lieu of probate fee) (d) as compared to an outright transfer by quit claim deed or warranty deed, the grantor might provide the remaindermen with a stepped-up basis for capital gains tax purposes {except that IRC section 1022 (d)(1)(A) has stopped the stepped-up basis, at least while such IRS section is in effect in 2010} (e) because the life tenant wants to purchase a life estate (and the grantor agrees) for Medicaid planning purposes ( , Mom purchases a life estate interest in daughter s home and Mom resides in the home with daughter) (f)

6 Because the life tenant wants a life estate interest in return for using his/her money to add an addition to the property, improve the property, make repairs, or pay back taxes A will or trust might grant various possible benefits to a a life estate interest, a right to occupy property for a specific period of time (months or years), the right to occupy property for one s lifetime (without such interest being a life estate), the right to receive rent from a property (without such interest being a life estate). 33. In Wisconsin, does a person lose any benefits by transferring property and keeping a life estate for himself? (a) You lose the senior citizens tax deferral benefit (b) You must normally get the agreement of others to sell the property (and you won t receive all of the sales proceeds, only part of the sales proceeds based on your age at the time of the sale) (c) You won t be able to easily take a mortgage out on the property (you need the remaindermen to sign also) 4.

7 What responsibilities/duties does a life tenant have? (a) The life tenant should protect and maintain the property (and keep insurance on the property as to his/her interest) (b) The life tenant should pay the real estate taxes on the property (unless otherwise specified by the document granting the life estate interest) (c) The life tenant should pay association dues, utilities, and make necessary repairs (unless otherwise specified by the document granting the life estate interest) (d) The life tenant should pay the interest on any mortgages (unless specified otherwise specified by the document granting the life estate interest) 5. What words in a will or trust could create a life estate interest? Some possible language could (a) Example: I grant a life estate interest to my daughter Susan Jones in the following property: 36 Lewis Lane, Grayslake, IL.

8 (b) Example: I give my son Samuel Smith a life estate in my principal residence (142 Main Street, Harrisville, IL). (c) Example: I give my wife Wilma Rockstone the right to occupy, use and benefit from my principal residence (48 Grass Road, Bestville, IL) for the duration of her lifetime. If the words right to occupy are used with the word use , then there is a good chance the interest given will be considered a life estate interest. (d) 1934 Massachusetts case of Thayer v. Shorey: grantor reserved to herself the right to occupy, rent, or improve the granted premises during her life (e) 1950 Massachusetts case of Langlois v. Langlois: a testamentary bequest to hold and use [the property] as she see[s] fit during her lifetime (f) 1966 Massachusetts case of Breare v.

9 Assessors of Peabody: grantor reserved the right to occupy the premises with the grantee during the term of [the grantor s] natural life (g) 1986 Massachusetts case of Kernat v Kivior: testamentary bequest whereby Said premises are conveyed subject to the rights of Helen V. Kivior to occupy the granted premises for the rest of her life. 6. What is a qualified life estate interest ? What I call a qualified life estate could last for the beneficiary s lifetime, or it could end early for a stated reason, such (a) if the beneficiary (a surviving wife) remarries or cohabits with a member of the opposite sex (who isn t a blood relative of the wife, such as a son or brother; or married to a relative of the wife, such as a son-in-law or brother-in-law) (b) if the beneficiary stops using the property as his/her principal residence for a specific period of time (such as 180 days in a calendar year) the beneficiary might want to spend winter months in a warmer state (so the client should probably allow for her to be out of the home for some time during the year) 4 (c) if the beneficiary enters an assisted living facility or nursing home (and is there for a specific period of time, or the beneficiary s doctor states in writing that s/he cannot live alone in the home anymore) (d) if the beneficiary does not fulfill some specific duty (such as paying the real estate taxes) 7.

10 What is some sample language for a qualified life estate? Upon my death, if Sam Jones (my father) survives me, then I give Sam Jones a qualified life estate in the property known as 1236 Sailor Drive, Greatville, IL. Sam shall be entitled to use the property until the first of the following events occurs, at which time the qualified life estate shall terminate: (a) Sam s death, (b) When Sam has been residing for one hundred twenty (120) consecutive days in a nursing home (after Sam has entered a nursing home, then also counting any days during which time where Sam is in an assisted living facility or a hospital as being days in the nursing home). (c) When Sam has been residing for one hundred twenty (120) consecutive days in an assisted living facility (after having entered such facility, then also counting any days during which time where Sam is in a hospital or nursing home as being days in the assisted living facility).