Life Estate versus Right of Occupancy Trust: Which Is Right for You?

Planning for the future of your home can be complicated, especially when you want to ensure that a loved one can continue living there after you are gone. Two common tools for accomplishing this are life estates and right of occupancy trusts. A life estate grants someone the legal right to live in a home for the rest of their life; however, while they can reside there, they do not own it outright. A right of occupancy trust allows someone to stay in the home under specific conditions set in a trust, giving more flexibility and control over how long they can remain. There are a few common scenarios in which people may use one of these tools.

As part of the greatest wealth transfer in modern history that is now underway, many younger Americans will inherit a home from their parents. This generational transfer is happening at a time when older Americans are living longer than ever. Many want to remain in their homes for as long as possible and transfer their home to a chosen loved one after their death, driving the need for estate planning tools such as life estates and right of occupancy trusts.

Both tools can help seniors age in place while facilitating the eventual transfer of their home to their children and other loved ones. However, there are key differences that can significantly impact an individual’s estate plan, loved ones, and remaining years. These tools are also common among blended families. With people marrying later in life or for a second or third time, it is possible that the home where the couple resides was originally the home of one of the spouses. Determining what happens if the home-owning spouse passes away first can bring about issues that need to be addressed through tools such as life estates and right of occupancy trusts.

What Is a Life Estate?

A life estate grants someone the right to possess and use a property for their lifetime. This person is known as the life tenant.

The life tenant has full use of the property and can even profit from it (e.g., by renting it out). However, their ownership is limited to their lifespan. When the life tenant dies, the property automatically passes to the designated remainderman (another word for beneficiary), who has a future interest in the property when the life tenant is alive that converts to a full ownership interest when the life tenant passes away.

A life estate is most often used when an owner wants to transfer property to a designated beneficiary (such as a child) while retaining the right to live on the property for the rest of their life. This allows the owner to stay in their home until they die and then have the property automatically pass to their chosen beneficiary without going through probate court.

For example, a life estate can be used in an estate plan to ensure that a caregiver, such as an adult child (the remainderman), has the right to inherit the property after providing care to an elderly parent (the life tenant). In this scenario, the caregiver lives in the home while the parent is still alive, with full ownership transferring to the caregiver child upon the parent’s death. A life estate can thus be a way to incentivize and compensate the caregiver for their services.

For married couples in which one spouse owns the home, a life estate ensures that the surviving spouse (the life tenant) can live in and use the home for the rest of their life. After the life tenant passes away, ownership of the home automatically transfers to the person or people chosen by the first spouse to pass away (which may be other family members or children from a prior relationship).

As both the life tenant and the remainderman have an ownership interest in the property, major decisions about the property, such as a decision to sell or mortgage, typically require both parties to agree.

What Is a Right of Occupancy Trust?

A right of occupancy trust is a legal tool that allows a designated individual to live on a property for a specified period of time, usually until they die or move away, giving them the right to occupy the property without full ownership. It is similar to a life estate; however, the beneficiary is not allowed to sell or transfer their interest in the property the way a life estate beneficiary can. They have a right to occupy, but they do not have an ownership interest.

The trust can outline the terms of occupancy, including defining responsibilities for expenses such as property taxes, insurance, and maintenance. It can also provide money to pay for property-related expenses. Upon the right of occupancy trust’s termination, the property is distributed according to the trust’s terms.

A right of occupancy trust is generally used when the current owner wants to provide for someone’s housing needs while retaining control over the property, wants to ensure that the property is passed down according to their wishes after a specified event or period, or needs the flexibility to address specific beneficiary needs.

A right of occupancy trust can ensure that a caregiver, such as an adult child or a hired aide, can continue living in the home for a set period after the aging parent passes away. This provides stability for the caregiver while preserving the home’s ultimate inheritance for the parent’s chosen beneficiaries.

In the context of marriage, if the spouse who owns the home passes away first, a right of occupancy trust can allow the surviving spouse to live in the home for a set period or under specific conditions, such as until they remarry or move out. This ensures that the surviving spouse has housing security while also protecting the home for eventual inheritance by the original owner’s chosen beneficiaries, such as children from a previous marriage.

Key Considerations: Life Estate versus Right of Occupancy Trust

Both life estates and right of occupancy trusts have a great deal to offer in terms of estate planning. They appear quite similar on the surface and offer some of the same benefits, but they have important differences. Here are some key things to consider as you weigh your options:

1. Probate Avoidance

• Life estate. When the life tenant dies, the property automatically passes to the remainderman (i.e., the beneficiary), so it does not need to go through the probate court process.
• Right of occupancy trust. Because the property is owned by the trust, it is not subject to probate when the original owner dies. When the owner dies, the beneficiary gets the right to occupy the property, and when the beneficiary dies or ceases to use the property, the trust determines what happens to the property.

2. Control over Property Distribution

• Life estate. The life tenant can live in and use the property as they see fit during their lifetime, but they cannot sell or mortgage the property without the remainderman’s consent.
• Right of occupancy trust. The beneficiary of a right of occupancy trust has a right to occupy the property during the stated time period but is limited in what they can do with it. The trustmaker can set specific conditions, such as requiring the occupant to maintain the property or pay certain expenses. The beneficiary of a right of occupancy trust generally cannot sell or mortgage the property unless the terms of the trust provide otherwise.

3. Ownership and Control

• Life estate. The life tenant can sell their life estate interest (not the entire property), and the buyer would be subject to the life tenant’s rights. Therefore, when the original life tenant dies, the buyer’s rights end. However, if both the remainderman and the life tenant agree, the entire property could potentially be sold: The life tenant would be entitled to a percentage of ownership interest based on their life expectancy, and the remainderman would receive the remaining interest.
• Right of occupancy trust. The trust owns the property, and the beneficiary has only the right to occupy it according to the trust terms. This arrangement provides greater control and prevents the beneficiary from selling their interest.

4. Financial Responsibilities

• Life estate. The life tenant is typically responsible for most property-related expenses, including property taxes, insurance, maintenance, and minor repairs. The remainderman is usually responsible for major and structural repairs and long-term improvements. This allocation of financial responsibilities may be negotiated.
• Right of occupancy trust. The trust document can specify who is responsible for various expenses.

5. Property Tax Implications

• Life estate. In some states, life estates may not be eligible for certain property tax benefits, such as homestead exemptions or limitations on annual property tax increases.
• Right of occupancy trust. Similarly, states may limit property tax benefits when the property is held in a trust.

Which Option Is Right for You?

The choice between a life estate and a right of occupancy trust should be based on individual circumstances and estate planning goals.

A life estate might be right in the following circumstances:

• You want to stay in your home for the rest of your life and then have it pass to somebody else.
• You want to give some level of ownership to the person you name as the life tenant.

Alternatively, a right of occupancy trust might be right in these circumstances:

• You want greater control over the property and the beneficiary’s occupancy rights.
• You want to specify who is responsible for property-related expenses.
• You need flexibility in defining the terms of occupancy and distribution.

When deciding which tool is right for you or whether other options are a better fit for your estate plan, consult with an attorney for personalized advice.

To learn more about estate planning, keep an eye on our Events page located at: https://www.wagnerlegalmn.com/events/.

If you’re ready to start being proactive about your estate plan, contact us to get started.

Want to stay informed? Subscribe to our quarterly newsletter for updates.