We had friends who grew up on a small apple orchard overlooking a lake. The kids helped the folks with the apple harvest, sold the fruit by the box to friends and family members, and pocketed the cash for spending money during the academic year.

In July and August, the family would take the outboard from one of the sheds on the property and spend long days waterskiing, fishing, and exploring the coastline of the long, narrow lake.

The three children attended colleges out of state, eventually married, and started families of their own. They returned to the family orchard, now worked by the neighbors, for brief summer visits to see the folks, crank up the boat, and show their children what they experienced growing up on the property.

When the matriarch died, their father remarried and lived happily on the orchard for nearly 10 years with his second wife. When he passed away, he gave his second wife a life estate, allowing her to live on the property until her death, at which time the place would pass to the kids.

What, exactly, is a life estate? Does it have any value? The question surfaced recently when the kids’ stepmom talked about the possibility of moving into an assisted living facility.

A life estate is a form of co-ownership. It is an agreement whereby an individual’s interest in property is limited to that individual’s life, with the property passing to other recipients at the individual’s death. The person who holds the life estate is called a life tenant, and those who receive the property at the death of the life tenant are called remaindermen.

Both the life tenant and the remaindermen have real interests in the property. However, unlike other partnerships or other forms of co-ownership, the life tenant and remaindermen do not have rights in the property at the same time. Instead, their interests are "stacked" in time, with only the life tenant holding a current right to possession. The remaindermen’s interest does not become activated until the death of the life tenant.

"A life estate is an actual form of ownership and not simply a right to use," said Bob Pittman, an attorney specializing in estate planning. "If your mom gives you her property, but retains a life estate, you still have to be nice to her. She ‘owns’ the house until the moment of her death, and she can kick you off the porch and hang up the phone on you.

"She needs to pay the taxes and keep the property in reasonably good shape. She could sell the property, but the buyer would only have rights until mom dies, and so not many people would ever buy the property. No lenders would loan mom money against the property since their interest would disappear when mom passes on."

According to Diana Zottman, trusts and estates specialist in the Seattle law firm of Keller Rohrback L.P., there is a value to a life estate. Upon sale, the life tenant is entitled to compensation for the sale of his or her interest. Life estates are valued using the age of the life tenant and the present fair market value of the property.

Several agencies publish actuarial charts, including the Internal Revenue Service (Table S/Section 1 ).

Zottman said that although life estates are generally terminated when the life estate tenant (or another specified person) dies, some life estates specify one or more other conditions that can trigger termination. These conditional limitations would cause the life estate to be terminated even though the life tenant is still alive and well. For example, a life estate may terminate if the tenant leaves the home for six months or more.

According to Zottman, the actual life estate document specifies any conditional limits that define when the life estate terminates. If there is no specific mention, it is assumed that the life estate terminates with the death of the life tenant.

In the case of the lake family, the life tenant (stepmom) was considering the possibility of using her share of the property to help fund her care at an assisted living facility. This sparked a "Should we sell?" conversation among the three siblings.

While they love the parcel and don’t relish the thought of giving it up, their future use would be minimal and the costs to maintain it will continue to rise.

If the sale question were to be taken to a vote and the three siblings agreed to sell, the life tenant (stepmom) would receive a portion as the life tenant and the children would receive equal shares (or percentages dictated by the original life estate agreement).

If the group could not come to an agreement to sell, neither the life tenant nor the remaindermen would have the upper hand. The children would receive the property upon the death of their stepmother, per the life estate agreement.

Next week: A living trust often can be more flexible than a life estate.

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