Does a Person with a Life Estate Own the Property?

A person with a life estate, also called a life tenant, does not own the property, but has the right to the use and possession of the property during his or her lifetime. The person who owns the property is the remainderman or remainder beneficiary.

How a Life Estate is Created

A property with a life estate is normally created using a life estate deed. In this deed, the grantor gives a person called the life tenant the right to the use and enjoyment of the property for the duration of the life tenant’s lifetime, and upon the life tenant’s death, full ownership is consolidated with the remainderman. To create a life estate deed, words expressly providing for the use, enjoyment, and benefit of the property during the life tenant’s lifetime is required. Simple words such as the transfer of property “subject to the life estate of” is also sufficient.

Usually, it is the grantor who transfers the property to the remainderman or remainder beneficiary, subject to the grantor’s life estate. This arrangement is usually found among parents and children, where the parent transfers the property to the child, subject to the parent’s life estate. This allows the property to avoid the expensive costs associated with probate courts.

Another way of creating a life estate is by last will and testament or trust. In this case, the testator or grantor, upon his or her death, will leave the property to the surviving spouse for the lifetime of the surviving spouse, and upon the surviving spouse’s death, such property will transfer to the remainder beneficiary who are usually the children, either from the existing or previous marriage.

Selling Property Subject to a Life Estate

Property subject to a life estate may be sold either by agreement between the life tenant and the remainder beneficiary or by petitioning the court for the sale of the subject property by either party.

The life tenant and remainder beneficiary may agree to sell the property with the proceeds divided amongst them in a proportion agreeable to both parties. This is the easiest way to sell property subject to a life estate.

However, there may be times when a life tenant would like to sell the property because he would like to move to another state, or the remainder beneficiary would like to sell the property because he does not want to wait for the life tenant’s death to use the property, and the other party does not agree. In this case, either the life tenant or the remainder beneficiary has the right, under RPAPL § 1602, to petition the court where the property is located for the sale of the property.

When an interested party, such as the life tenant or remainder beneficiary, petitions the court for the sale of property subject of a life estate, the interested party must show that the act is expedient. Expedient is defined as characterized by suitability, practicality, and efficiency in achieving a particular end; fit, proper or advantageous under the circumstances. A petition has been granted as expedient where the purchase price was well in excess of the appraised value; the rent was insufficient to pay the taxes; the house was unoccupied; and the life tenant would have to expend a considerable sum of money for taxes, insurance and maintenance of the house. Matter of Sauer, 194 Misc.2d 634 (Sur Ct, Nassau County 2002), citing Matter of Gaffers, 254 App Div 448, 450.

Dividing Sales Proceeds Between the Life Tenant and Remainder Beneficiary

Under RPAPL § 967, a life tenant is entitled to have a proportion of the proceeds of the sale in such manner as the court deems calculated to protect the rights and interests of the parties. Determining the value of the life tenant’s interest will consist of identifying the life expectancy of the life tenant from the date the life estate was established and using an actuarial table to determine its present value. In New York, the Appellate Division First Department has approved the calculation of the value of a life interest based upon the life estate and remainder interest table promulgated by the Department of Health and Human Services Health Care Financing Administration.

Still, the life tenant is also liable for his share of closing costs, transfer taxes, and real estate broker’s commissions and outstanding real estate taxes due until the extinguishment of the life interest.

Petitioning the court for the sale of property subject to a life interest can be complex. If there is any disagreement between the life tenant and remainder beneficiary regarding the sale of the property, it is important to seek the advice of an experienced life estate attorney to know your options and to be adequately represented in any petition to the court for the sale of such property. Should you need assistance, 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].

What the Life Tenant Can and Cannot Transfer

Although a life tenant cannot convey full ownership of the property alone, the life tenant does hold a real and transferable interest. During the life tenant's lifetime, the life tenant may:

• Rent the property out and keep the rental income.
• Make improvements to the property at his or her own expense.
• Sell or assign the life estate itself. The buyer, however, receives only the right to use the property for the duration of the original life tenant's lifetime — an interest that ends when that person dies. As a practical matter, there are very few buyers for such an interest.

There are also firm limits on the life tenant's interest:

• The life tenant cannot leave the property by will. The life estate ends at death, and the property passes to the remainderman by operation of law, regardless of what the life tenant's will says.
• The life tenant cannot mortgage the property in a way that binds the remainder interest. A lender can only reach the life estate itself, which extinguishes at the life tenant's death, so financing secured by a life estate alone is rarely available.

The Remainderman's Interest and the Duty Not to Commit Waste

The remainderman also holds a transferable interest before the life tenant's death. The remainderman may sell or assign the remainder interest, or devise it by will, but the recipient takes only a future interest that becomes possessory when the life tenant dies. What the remainderman cannot do is occupy the property, collect its rents, or force the life tenant out during the life tenant's lifetime.

In exchange, the life tenant owes a duty to the remainderman not to diminish the value of the property. New York recognizes claims for waste, governed in part by RPAPL Article 8 (sections 801–861), which addresses actions for waste against a life tenant. Conduct that can support a waste claim includes:

• Failing to pay property taxes.
• Allowing the property to fall into serious disrepair.
• Demolishing structures or stripping fixtures from the property.

A life tenant who commits waste may be liable for damages, and in egregious cases may forfeit the life estate. A remainderman who believes the property is being run down has standing to sue to protect the future interest.

Tax Consequences of Selling During the Life Tenant's Lifetime

Whether to sell the property during the life tenant's lifetime or wait until the life tenant's death can have significant tax consequences. Because a properly drafted retained life estate keeps the property in the life tenant's taxable estate, the remainderman generally receives a step-up in cost basis at the life tenant's death. If the property is held until then, the remainderman can often sell with little or no capital gains tax. Selling during the life tenant's lifetime forfeits this advantage.

If the property is sold during the life tenant's lifetime, the capital gain and cost basis are allocated between the life tenant and the remainderman using the same actuarial framework used to divide the proceeds, so each party reports its own portion of the gain. For federal tax purposes, the life estate and remainder factors are computed using the IRS actuarial tables and the Section 7520 interest rate in effect for the month of the transaction. Before agreeing to a sale, both parties should confirm the current factors and consider the tax exposure on each side, as these figures often affect how the proceeds are ultimately divided.