How a Life Estate Can Help (or Hurt) Your Estate Planning

In addition to a Last Will and Testament or Living Trust, an often overlooked estate planning tool is the life estate. A life estate is like a trust except that it’s created by executing a deed giving a person the right to use a particular piece of land for life. After that person’s death, ownership automatically reverts to one or more remaindermen, the heirs specified in the life estate.

As an example, let’s say you own your house and wish to leave it to your only daughter upon your death. You might create a life estate entitling you to continue living in the house until your death, at which point your daughter inherits as remainderman. Unlike leaving the house to your daughter through a Last Will and Testament, under a life estate the property never passes into probate, because your ownership terminates at the moment of your death. In this respect a life estate functions much like a trust-property passes to your designated heirs outside of probate.

As the holder of a life estate, you would continue to exercise full ownership of the house during your lifetime. In theory you could even sell the house, provided the buyer surrenders the property to your daughter upon your death. And just like a tenant of a rental property, you also cannot take any action that might devalue the property or prevent the remaindermen from later enjoying full use of the property.

“Implied” Agreements May Not Be Honored After Death
While it is always best to expressly create a life trust in writing, California courts may recognize an implied trust created under what is called the resulting trust doctrine. The California Court of Appeals in Los Angeles recently applied that doctrine to a case involving David Belmont.
Around 2000, Belmont’s sister, Eileen, requested his help in paying for the care of their mother Wilma. David Belmont agreed to sell his house (which was originally purchased with money gifted by Wilma) and use the proceeds to finance his mother’s care. In exchange, Eileen Belmont would use any remaining funds to purchase a new home for David Belmont at a later date.

David Belmont moved into a new condo in 2003. He used approximately $100,000 leftover from the sale of his previous home-funds deposited into an account owned by Eileen-and his sister obtained a loan for the remainder of the purchase price. Eileen Belmont held title to the house under the expectation she would outlive David and move into the home after his death.
Unfortunately, Eileen Belmont died in 2007.

There was no written documentation of any life estate and Eileen Belmont’s will specified the majority of her probate estate go to a nonprofit organization. David Belmont asked his sister’s executor to recognize the oral agreement that he remain in the house until his death, but the executor refused. Belmont pursued his claims in court and eventually prevailed, both at trial and on appeal. The trial court found there was more than sufficient evidence to demonstrate Eileen Belmont’s intention to create a life estate in the house for her brother. The original 2000 agreement between the siblings and David’s subsequent actions-selling his original house and
purchasing a new one with the proceeds-resulted in the formation of a life estate. Therefore,
the courts held he could remain in the house until his death, at which time title automatically passes to the foundation named in Eileen Belmont’s will.

Always Conduct Estate Planning In Writing
David Belmont’s situation was unusual and the facts of his case are not necessarily applicable to future disputes that may arise under California law. But the point of a life estate is to facilitate the transfer of property after death. It can only fulfill that function when the parties expressly establish their intentions and obligations in writing. If you think a life estate may be appropriate for your home or other property, it’s important to speak with a California estate planning attorney
as soon as possible. Call the Law Office of Scott C. Soady at 1-858-618-5510 if you live in the San Diego area and have any questions about life estates or any other estate planning tool.