What is a life estate? Simply put, it is a present interest in real property that is limited by the duration of a measuring life. The measuring life is usually, but not always, the current tenant or occupant of the property. The measuring life can also be that of any living third party. Therefore, once the measuring life ends (whether they are the occupant or not), the life estate is terminated, and a party known as the “remainderman” is “vested” as the new present owner of the property. Remaindermen come in many forms but are most often either the party who granted the life estate away originally, or some related third party (when the life estate was created by reservation as part of an estate plan).

One of the most common places a life estate rears its head into the world of real property is by the way of a Will. Frequently, landowners wishing to keep some property in their family long after they have died, will devise a life estate in their property to a son, daughter or even surviving spouse. A sample provision might read: “I leave my farm in Reeves County to my son, Bobby for his life, and upon his death, to his children Joey and Susie.” This provision grants Bobby a Life Estate (making him the “Life Tenant”) and allows him to occupy and enjoy the farm for the duration of his life. It also specifies that Joey and Susie are the remaindermen and guarantees that they will have rights to the property after their father’s death.

To paint a clearer picture of the above scenario, by way of example, let us use my friend Fred the farmer. Fred owns 100 acres located in beautiful West Texas. Right in the middle of the oil rich Permian Basin. Fred has two sons, Alfred, and Bobby. Alfred loves West Texas life and has always been a great help to his father. While Fred’s other son, Bobby, has always loved the idea of big city life. In fact, Bobby loves the city so much, he left the family farm in West Texas as soon as he turned eighteen. Bobby now rarely visits, and when he is around, he offers no help with managing the land.

Several decades have now gone by since Bobby left the farm. Fred is growing older and he has been thinking about what will happen to the 100 acres after he passes away. He wants to make sure his land stays in the family and believes Alfred should inherit the 100 acres because he loves them like Fred. The only problem is Alfred has been so invested with the farm that he has never married and has no children. Further still, Fred thinks it is highly unlikely Alfred will ever settle down, get married, and have grandchildren to one day pass the 100 acres on to. All the while, Fred’s son Bobby has three boys who, when visiting their grandfather out at the farm, love to help out with the cattle, and even take a keen interest in various other land management activities, like mending fences, to keep the farm in good shape.

With the goal of keeping the farm in the family, Fred talks to his longtime friend and attorney, George. George advises Fred to bequeath (leave through a Will) the farm to his son Alfred, for life, with the remainder going to Bobby’s three sons equally. Fred takes George's advice, and has his Will drafted leaving Alfred with a life estate to the farm and naming Bobby’s three sons as the remaindermen.

Many years later, long after Fred the farmer has died and Alfred has taken ownership of the farm, Alfred has grown weary of the dry summer heat of West Texas. Alfred now wishes to sell the family farm and use the money to buy a nice home in Dallas. He would like to retire near his three nephews and brother Bobby.

But this beckons the question, can one even sell a life estate? And if so, for how much? How does one value a life estate when it is based on the measuring life of an individual still living?

It’s actually very simple! Let me explain.

You can determine the value of a life estate by going to the IRS actuarial tables conveniently located at:

https://www.irs.gov/retirement-plans/actuarial-tables

You then take your age, and use the number located next to it on said actuarial table. Now you multiply that number by the current value of the land you wish to sell and there you have it! The value of the life estate.

For example, let’s say Alfred owns 100% of the surface to the family farm, but only ⅓ of the minerals to the family farm. Alfred would need to multiply the IRS number associated with his age by ⅓ (the total percent of ownership he has of the minerals underneath the surface of the land) and the value of the minerals. Here, the present value of one net mineral acre located in the prime Permian Basin, goes for around $6,000.00. We would next simply multiple our information as follows to get a rough fair market value of Alfred’s current ownership of the minerals to the family farm:

⅓ x [IRS Actuary Number] x $6,000.00 x 100 = Total Value of Life Estate

And there you have it, that is the value of Alfred’s current mineral interest in the family farm in West Texas. A calculation like this and a determination of the actual percent ownership of the oil, gas and other minerals set out in the equation above, can best be handled by an experienced attorney to ensure your rights are protected.

We have now covered one of the most common ways life estates enter the world of real estate, but the term “most common” implies there are other ways? Yes, there are a few more. One could use a Lady Bird Deed or a Transfer on Death Deed (“Todd,” for short) to create a life estate as well! If you would like more information as to these alternate methods for life estate creation, please come back in the following weeks and read my later blog posts on these subjects.