A Life Estate for Surviving Spouse – A person may decide to give their surviving spouse the right to live in the residence for life (i.e., “a life estate”) and leave their children full ownership of the residence once the surviving spouse no longer lives there. Let us consider the issues raised by such a scenario.
Why use a life estate? The life estate approach may be motivated by the following reasons: (1) to ensure that their children will receive the residence after the surviving spouse no longer lives in the residence; (2) to ensure that any estate recovery claim by Medi-Cal or SSI against the surviving spouse (at the surviving spouse’s own death) are avoided; and (3) to ensure that any debts of the surviving spouse alone (including possible future debts) do not prevent the children receiving the residence
The desirability and feasibility of surviving spouse remaining in the home must be considered. Does the surviving spouse want and is he or she able to remain in the house for the long term? Maybe the surviving spouse will decide to downsize and move out or relocate to be nearer children. How will the real property taxes, maintenance and utilities get paid? Such expenses can be paid using additional assets left by the deceased spouse for the benefit of the surviving spouse, or using the surviving spouse’s own resources, or by using both.
What does a life estate mean for the surviving spouse? The surviving spouse has a right to remain in the home until she or she dies, provided no limitations placed on the life estate have been violated: the life estate might terminate when the surviving spouse remarries; when the surviving spouse no longer pays the expenses associated with the residence; when the surviving spouse moves out of the residence; or when the surviving spouse decides to sell the residence. None of these limitations are required.
What happens when the life estate ends at the surviving spouse’s death? It may mean that the surviving children become co owners of the residence, or, if life estate is held in a trust, it may mean that the trustee can now sell the residence and distribute the proceeds to the children, or else hold such proceeds in further trust for the children’s benefit.
If the life estate ends earlier during the surviving spouse’s lifetime – because a limitation was triggered — then the outcome again depends on the terms of the decedent’s gift. It may be that, if the residence is sold, the proceeds are divided amongst the surviving spouse and the children. It might also be that, if the surviving spouse remarries or move out of the residence, the surviving spouse loses all beneficial interests in the residence and the children receive their inheritances.
Can the surviving spouse with a life estate sell the residence or borrow against the residence? No, typically the surviving spouse acting alone (i.e., without the consent of the remainder beneficiaries) cannot transfer title to the residence and cannot borrow against the residence. Sometimes, but not usually, a deceased spouse’s trust may allow the trustee to sell or borrow for the benefit of the surviving spouse.
How is a life estate implemented? Various ways exist: (1) The life estate could be made inside the decedent’s trust or will, either of which could require that the residence be held in further trust for the surviving spouse; (2) The gift might be subject to conditions, as discussed above; (3) Title to the residence could be deeded out from the deceased spouse’s estate to the children subject to a life estate in favor of the surviving spouse.
The foregoing illustrates some general considerations and possibilities. Consult a qualified estate planner before reaching any specific conclusions.