Hello, and welcome back to my discussion of life estates. In my prior blog post covering this subject, I compared life estates with full ownership of real estate, or what is known as Fee Simple Absolute in legalese. As a recap, upon the death of the owner of a life estate (a.k.a. a “life tenant”), the ownership of land automatically vests in a third party, or what is known as a “Remainderman.” I have previously discussed in my blog, “Live, Laugh, Life Estate” how one can create a life estate through use of a Last Will and Testament, as well as a method for valuing the ownership of a life estate. This blog will focus on “Enhanced Life Estates” generally, other “term estates” and the “Enhanced Life Estates” created by use of Lady Bird Deeds and Transfer On Death Deeds (“TODD”).
Life estate ownership should be contrasted with other term estates such as tenancies for years and leasehold estates. A leasehold estate is a temporary mechanism that ensures a short term right to occupy land. This is commonly seen with apartments or rental homes. However, in various countries and cities in the United States (namely, New York City) it is not uncommon to see an apartment lease last up to 99-years. It is important to note that this does not create a life estate. That is because a leasehold estate usually has a fixed and definite end date. Compared to a life estate, which may go on for a few years, or many decades, as with the famous case of Jeanne Calment.
Mrs. Calment is notable for being the oldest, well documented human to ever live. Mrs. Calment died in 1997 at the age of 122. But more importantly, and relevant to this blog post, is the fact that at the age of 90 she sold her apartment and reserved a life estate therein. Much to the chagrin of the remainderman, Mrs. Calment would later go on to live another 32 years and outlive the man to whom she sold the apartment!
As mentioned above, those wishing to fully utilize life estates in practice should consider both Lady Bird Deeds and TODDs as part of their estate plans. To fully understand a Lady Bird Deed, one must bring up the 36th president, Lyndon B. Johnson (“LBJ”), and his life in Texas. A Texan by birth, LBJ spent his youth and final years of his life in the Texas Hill Country where he owned a large ranch.
As the story goes, the ex-president wished to give the ranch to his wife, Claudia “Lady Bird” Johnson, possibly to avoid what would be a complex probate. The creative thinking LBJ, conveyed this property to his wife, but reserved a life estate in the ranch, so that upon his death, the family home, and the land it was situated on, could pass to his wife, probate free. One interesting twist of LBJ’s deed to his wife was that he also reserved the right to convey the property during his life and cut off his wife’s future interest in the land. While we do not know all of the details of this story, we do know that Lady Bird Johnson ended up living on the ranch until her death in 2007.
This great Texas myth is claimed to be the origin of Lady Bird Deeds in Texas. This type of land transfer has been in existence through common law long before LBJ conveyed his ranch to his wife. A conveyance wherein the grantor conveys a future interest in real property contingent upon the grantor’s death and is known as a “Vested Remainder subject to Total Divestment.”
Over time, this type of conveyance became so popular, that Texas, and many other states, created the TODD to help standardize, streamline and scratch an itch many Texans thought they had, namely avoidance of probate. With the TODD, one can transfer real property, on the death of the current owner to their kids, spouse, or other family members, without the need of probate or ever having to step foot into a courthouse, while also allowing the grantor to change their mind and sell the property at a later date. A win-win situation for the grantor.
Before moving any further, I need to discuss the subtle difference between life estates created by Lady Bird Deeds and TODDs. When the grantor in these deeds conveys the property to the grantee, and reserves a life estate therein, with the power to convey said property outright, they are actually reserving an “Enhanced Life Estate”. The reason the reservation is called an “Enhanced Life Estate,” is because the grantor in these two deeds is also retaining the power to convey the property before they die. The power to still convey the property, if used, completely divests the remaindermen, or grantee in the deed, from their future interest in the land, regardless of whether the original grantor dies. Lastly, Lady Bird Deeds tend to be used for Medicaid purposes, while TODDs are used more for probate avoidance, and cannot be tweaked as much.
This might all sound a little confusing, so allow me to explain by way of example: Say Ollie owns Blackacre. Ollie then decides to convey Blackacre to Alfred, reserving an Enhanced Life Estate (remember, this means he can still convey Blackacre at a later date, before he dies). Two options now exist for how the property might move going forward. If Ollie dies without having conveyed the property to an additional third party, let us call this person Billy, then the property fully vests in Alfred. However, if Ollie conveys the property to Billy, and then dies, Alfred is stripped of this future right to receive Blackacre.
With this, you might think we have discussed all possible ways to create a life estate interest in real property. We have discussed life estates created by a Will and we have discussed life estates created by deeds. We have also discussed a method for valuing life estates. Through all of this, we have learned that the creation of life estates can be a valuable estate planning tool. But is this all there is to life estates? No. There is also the elusive, intestate death of a landowner, who acquired real property before their current marriage. This too creates a life estate. Suffice it to say, using a competent attorney for estate planning is a great way of ensuring your wishes for your property are honored after you pass.