Disagreement over valuation of a life estate

Disagreements over valuation of a life estate often occur between a life tenant and a remainderman.

The parties

The life tenant is the person with the right to enjoy the use of the property typically for his or her entire life. The life tenant can exercise all acts of ownership without the consent of the remainderman, except the right to sell or mortgage the property.

The remainderman is entitled to the property only upon death of the life tenant. Sometimes, the life estate will contain a condition that the remainderman’s right to the property occurs upon the happening of an event (not necessarily death) of the life tenant.

When evaluating cases regarding life estate, it’s always important to read the source document to see what, if any, are the terms and conditions of the life estate. In the absence of any provision, the life estate terminates upon the death of the life tenant.

A life estate is an affordable way to transfer real property to the next generation without passing through probate.

When life estates are used

It has been used in several family scenarios:

When a parent is old and needs assisted care

Here, the parent and child would live together. They will enter into an agreement where the parent would transfer the property to the child, but with the parent being entitled to use the property for his lifetime and the child’s right to the property only arising after the death of the parent. The parent is the life tenant and the child the is remainderman.

In blended families

In blended families where the spouses have children from a prior marriage or partnership, one spouse usually leaves his real property to the present spouse only as a life tenant, and upon death of the present spouse, to deceased spouse’s children, as remaindermen.

To avoid probate

When the parent’s only substantial property to be transferred to the next generation is real property, the parent will transfer the property already to his children, retaining a life estate for him or herself. This allows him to live in his property rent free for the rest of his life, and upon his death, transferring such property to his children without going through the more expensive process of probate. In life estates, only a death certificate and an affidavit are mostly required to transfer property from the life tenant to the remaindermen.

Sale of property subjected to a life estate

In a life estate, the remainderman cannot sell the property without the consent of the life tenant. The life tenant, on the other hand, can demand in New York to be paid a gross lump sum based on the value of his life estate, in case the life tenant wants to sell the property, in accordance with Matter of Strohe, 7 Misc 3d 853 (2005) and Matter of Sauer, 195 Misc 2d 232 (2003).

In case the remainderman disagrees, the life tenant can petition the court to approve the sale and the court must award a lumpsum unless unreasonable hardship will result to the remainderman. RPAPL § 968 states that although the power to allow an owner to receive a sum in gross for a life estate rests in the discretion of the court, the court must award that sum in gross unless it finds that unreasonable hardship is likely to be caused to the remainderman.

How to value life estate in New York

To value the life tenant’s life estate in real property, RPAPL §§ 403 and 406 are controlling. Under these provisions, the allocation of net proceeds of sale between a life tenant and a remainderman must be calculated by the New York Superintendent of Insurance based upon the life tenant’s age at the date of sale with an interest rate of 4%, compounded annually, under RPAPL § 402. The certificate issued by the New York Superintendent of Insurance regarding the proper method of computation will be conclusive evidence. In OGC Opinion 05-06-26 dated June 23, 2005 issued by the New York State Insurance Department, the Superintendent of Insurance may, but is not required to, use the tables prescribed by the Secretary of Internal Revenue under 26 USCA § 7520(a).

Disputes regarding life estates

When there is disagreement regarding the value of a life estate, one must remember that the following three factors are considered: value of the property, age of the life tenant, and gender. The age of the life tenant and gender will be used to compute the remaining expected life of the life tenant based on prescribed tables. The life tenant’s remaining expectancy will then be used to compute for the gross lump sum the life tenant is entitled to if the property is sold while the life tenant is still alive.

If the life tenant and the remaindermen do not agree, the life tenant can force the sale by filing a petition with the court requesting that he be paid the present value of his life estate in gross sum. The remaindermen can oppose by showing that such sale will cause unreasonable hardship to them.

What is unreasonable hardship for the remainderman?

The life tenant’s application to sell the property has been denied when the payment in gross sum results to the depletion of the entire fund, leaving nothing for the remainderman. Mosher v. Wright, 200 Misc 792 (1951). The depletion of the entire fund will result to unreasonable hardship for the remaindermen.

If the withdrawal of the value of the life estate will leave a remaining balance for the remaindermen, this application may be approved, since such remaining balance can earn accumulated interest over the life expectancy of the life tenant which would restore the fund to the present corpus for the remaindermen. Matter of Sauer, 757 N.Y.S.2d 709 (2003).

If you have disagreements regarding the valuation of a life estate and both parties are not willing to budge with regard to their proposed valuation, the life tenant can file a petition with the court, and such determination of valuation will be referred to the New York Superintendent of Insurance. Should you need assistance in filing your petition, we, at the law offices of Albert Goodwin, are here for you. We have offices in New York City, Brooklyn, NY and Queens, NY. You can call us at 212-233-1233 or send us an email at [email protected].