Article

Life Estates: Real and Personal

While a life estate is a concept many are aware of, this seemingly simple method of distributing real property requires careful consideration of many factors in order to achieve maximum benefit with minimum legal intervention. 

It is important to consider whether the correct terms are being utilized to ensure that a life estate, and not a tenancy in common or a mere use and occupancy, are devised. 

Also, will the life tenant be given a power to sell the property and if so what happens to the proceeds? Or will the life estate qualify for the marital deduction? And can personal as well as real property be disposed of pursuant to a life estate and if so, what are the attributes of a life estate in personality?

While some of the answers to these questions may be found in a well-crafted document, many times one must rely on state, statutes and case law for guidance. It is at that point when it becomes apparent that life estates are anything but simple.

Creating a Life Estate

A Life Estate is a common estate planning concept which may avoid probate and will achieve the grantor's intent to benefit his heirs, particularly in the case of multiple marriages. Although many times a life estate is created by means of a deed, it is more commonly and more effectively created through the use of a will or trust. By incorporating the terms of a life estate in your estate planning documents, you can ensure that all the rights, powers, and limitations you wish to grant to your life tenant are specifically set forth.

Although there is no particular word or phrase that is necessary to create a life estate, the expressed intention of the grantor, evidenced by clear and unequivocal language, will ensure that later disputes over ownership rights are not decided in the courtroom. It is important to note that simply providing that the grantor's life tenant can “use and occupy” the property for a set term will not necessarily create a life estate.¹ A life estate is more than a right to occupy since a life tenant is “tantamount to the owner of the property and is entitled to all the benefits and burden[s] of such ownership...so long as the remainder interest is not affected.”² Therefore, since SCPA 103(30) defines a life tenant, a phrase such as "use and possession of real [or personal] property as and for a life estate" should remove any uncertainty.

Real Property

Life estates in real property provide the life tenant with the right to live in, use and enjoy the property for a term definite, i.e., the duration of the measuring life. Of course, this use and enjoyment is subject to the life tenant's obligation to maintain the property at its current condition. This includes all maintenance and repairs, payment of interest on any outstanding mortgages and payment of real estate taxes. To avoid any ambiguity, language can be incorporated into the governing instrument limiting or releasing the life tenant's responsibility to make such payments. However, one must be careful when drafting these clauses to avoid any claim that the obligations are contingencies and that a reversion will result from any breach. Thus, when considering the use of a life estate as a planning tool, taking care to determine and record who is responsible for the daily expenses, maintenance, and repairs should provide sufficient direction to the parties to avoid many potential conflicts.

Yet even careful drafting cannot account for unforeseen circumstances that may require the life tenant to move to a smaller residence, assisted living or retirement facility. While New York case law has given life tenants the power to sell the property, this authority should be expressly provided for in the drafting language to avoid any ambiguity or potential leeway for litigation.³

Another issue to take into account when considering the use of a life estate is whether it will qualify, and whether the grantor wishes it to qualify, for the marital deduction. While property passing from the decedent to a surviving spouse generally qualifies for the marital deduction, a terminable interest, such as a pure life estate, will not qualify unless the qualified terminable interest property (QTIP) election is made. However, one can qualify a life estate for the marital deduction by providing the life tenant the property for her life use and possession with all the powers properly granted a trustee. The life tenant can then dispose of the property as if she is the sole owner and any potential purchaser will be under no obligation to inquire about the interests of the remainder persons.

Moreover, if the life tenant elects to sell the property, the proceeds of the sale, if a new residence is not purchased or the entire net proceeds are not utilized in the purchase of the replacement residence, can be placed into a trust from which the life tenant will receive the net income for her life. Upon the life tenant's death or upon an execution of release by the life tenant, the property would pass to the grantor's intended heirs.

For example, the grantor would provide that I devise and bequeath my residence, X, to my wife for her life use and possession without any bond or security…  My wife shall have the power to sell X without the joinder or consent of the remaindermen and, if she elects to do so, she may from the net proceeds purchase such other residence as she may desire. In the event any excess remains from the proceeds of the sale of X or my wife elects not to purchase a new residence, the entire net proceeds of such sale shall be distributed to my Trustees as principal for a separate trust for the benefit of my wife, income for life, remainder to my issue, per stirpes.

This method of making the QTIP election for a legal life estate ensures that the marital deduction can be utilized.  Of course, it is also possible to overcome the marital deduction hurdle by simply creating a 'QTIP trust for the sold residence which provides that the surviving spouse shall receive all the income until the trust terminates. 

Finally, the concept of a life estate in real property was expanded when a party to a holdover proceeding argued the existence of an oral, life estate interest.⁴ The court focused on the actions taken by the occupant including providing money toward the purchase of the house, taking possession of the second-floor apartment immediately after his daughter, and son-in-law consummated the purchase and occupying the premises for several years without paying rent, to permit an oral life estate defense.⁵

Personalty

It is recognized that a life estate can be established in personalty and New York case law provides that a life tenant of personalty who takes possession of the property will be treated in the same manner as a trustee with the obligation to preserve the principal for the remainder person.  However, it is not always clear whether the life tenant will take title and possession of the personalty.  Therefore, it is essential that the Intent of the grantor is clearly set forth in the governing document.  Absent clear and unequivocal language, the life tenant will not take possession unless he or she is given the right to consume or possession of the personalty is essential to its use, i.e., furniture. In the majority of the situations involving life estates of personalty, the executor will retain the title of the property and invest' same for the benefit of the life tenant and the remainder person.

Life Estate or Trust

As with any estate planning concept, there are advantages and disadvantages to utilizing a life estate as a method of distributing property.  Of course, a clear advantage to a life' estate is that a trustee is not always' necessary. Moreover, where the life estate is being utilized to provide a residence for the surviving spouse while at the same time providing that one's children ultimately receive the value or use and enjoyment of the residence, a trust may be a needless complication, However, the choice between a life estate and a trust may not be so clear cut when the grantor is/concerned about the maintenance, administration, protection and preservation of the property.

This may come into play when the surviving spouse is not related to the intended heirs. Occasionally there may be disputes between the parties or concerns as to the preservation of the property. It is in these situations that the grantor should reflect upon the use of a trust instead o( a life estate to achieve his testamentary intent while preserving familial harmony. Another reason to choose a trust over a life estate exists when the grantor is concerned about the life tenant's ability to afford the rising cost of living, a relevant, concern considering the current economic climate. A properly funded trust, will assure the grantor that the life tenant will be able to live in the residence for the duration of her life while protecting the property for the intended heirs.

Conclusion

A life estate is a well-known estate planning concept which, if properly drafted, may avoid probate as well as provide that the grantor's intended heirs eventually receive title to the property. However, it is essential to carefully consider the multiple ramifications inherent in life estates before embarking on such a program.

Notes

1. See, e.g., In re Estate of Reynolds, 40 AD3d 320,836 NYS.2d 97, 2007.N.Y. Slip Op. 04037 (N.Y.A.D. I Dept. May 10, 2007))
2. Matter of the Estate of Strohe, 799 NYS2d 164,164, 2004WL 2903616, 2004 N.Y. SlipOp. 51592(U), "2 (Surf. Ct.NassauCo. 2004).
3. For an interesting and informative discussion on this Issue, see Matter of the 'Estate of Strohe, 799 NYS2d 164, 2004 WL 2903616" 2004 N.V. Slip Op. 51592(U) (Surr. Ct. Nassau Co. 2004); Matter of the Eslale of Strohe, 7 Mlse.3d 853, 2005 NY Slip Op 25103 (Surr. Ct. Nassau Co. 20,05); and In Re Mantineo, 2007 NY Slip Op 51399(U),16 Misc3d 1112A, 847 NYS2d 897, 2007 N.Y. Misc. LEXIS 5010, 238 NYU 35 (Surf. Ct. Nassau Co, 2007))
4. See Palodino II. Sotiffe, 15 Mlsc3d. 60 (Appellate Term, 2d
   Dept. 2007
   ) (Oral life estate defense permitted in holdover proceeding).
5. ld. at 63