Estates – the proverbial train wreck over a bundle of sticks

In this episode, John Ross and Lisa Shoalmire discuss estates and how quickly and easily things can get out of hand!

Episode Transcript
Lisa
Well, welcome everyone to Aging Insight on what so far has been a bit of a dry Saturday morning.
Lisa
So this week, I had a family come in and they had just lost their dad, I mean just a week ago, just lost their dad. And they were three kids, good, stand up kids, independent. Dad was in his 90s, so these kids were in their 60s and 70s, so we're not talking about spring chickens here. So they obviously had their life in order and they had their own kids and grandkids, but the dad had been married a couple of times which, hey, is not unusual.
John
Life is for the living.
Lisa
That's right. And dad had done a will, oh gosh, maybe four, five years ago, and in that will, he left his present wife something called a "life estate" and his home which was, he'd owned his home prior to marrying this wife, he left a life estate in his bank account to his present wife, he left a life estate to his wife and his present vehicle, and then he left all the kids, he called them remainder men, remainder interest holders. So really, the kids were coming in to visit to find out what exactly does that mean and what does that mean that his present wife who is still living, what could she do with all of these property, the money, the real estate, the car that dad had left a life estate to her?
John
So you should be getting the indication that we're gonna be talking about life estates because these things are train wrecks on a routine basis, and yet they are pervasive out there. Because not only do people unintentionally or, I guess, intentionally but without the knowledge of the consequences.
Lisa
Yeah, they don't understand what they're doing.
John
Do that, like in this gentleman where they intentionally create the life estate without realizing the consequences. But you also have various statutory, so various laws out there, that create life estate interests in certain parties, like a surviving spouse for somebody who died without a will in certain circumstances. Or if you're one of those crazy Cajuns over on the Louisiana side, there's certain life interests that are called usufructuary interests.
Lisa
Whoa, we're getting out of our lane there. [chuckle]
John
But you see these, essentially this right to use. Let's start by going into property 101.
Lisa
Yes. In law school, so this is your law school lecture for the day. In law school they talk about the rights to property being like a bundle of sticks.
John
Oh, yes, the classic bundle of sticks analogy. Every person that's ever been to law school has all... Every one of them has had to take a property class, and during that property class, probably on the first day of that property class, the professor stood up in the front of the room and said, "Property is like a bundle of sticks."
Lisa
Right. The way to think about this is, you can have separate rights to different parts of property. So if we talk about real estate, John, you can have a right to the surface, you can have a right to the water, you can have a right to the minerals, you can have a right to the crops or the standing timber.
John
Structures on top of the dirt.
Lisa
You can have a present right, or you could have a future right.
John
Yeah. And all of these different rights could be all combined into one bundle.
John
It's yours to do what you... You own it all. It's yours to do with it what you want.
Lisa
Yeah, you could sell it, you can mortgage it, you could rent it out, you could dig in the dirt, you can do whatever you want.
John
Yeah. I get this a lot of times in the office where I will say something about... I'll say, "Oh, well, you know, we've created this trust for you and I'm gonna go ahead and do a deed that deeds your land into the trust." And a lot of times, they will say, "Well, what about the house?"
Lisa
Right.
John
Well, yeah. See, when I say I'm deeding the land, what I'm talking about is I'm deeding the whole bundle of sticks. When I say the land, I'm talking about the land, the minerals under the land, the structures on top of the land, the whole bundle. But you can take a stick out of this bundle.
Lisa
Sure. I mean, many of you may have purchased property where you own the property and you own everything about that property, except the minerals.
John
Or vice versa. You might own some mineral interests but don't actually own the property itself.
Lisa
Right. That bundle of sticks can be unbundled.
John
That's right. If you ever had some timber property and you sold the timber off of that property, but retained the ownership of the property itself, you took one of the sticks out of your bundle. Your right to the crops on top of the land, you took that stick out of the bundle, gave it to a timber company and then they cut all the trees off. These are examples and so, within your bundle of sticks, like Lisa said, you've got a present ownership interest and possibly a future ownership interest.
John
I would say probably the most common form of this, and I've seen this for years because this has been a common practice particularly of attorneys who are not familiar with the elder law field, where somebody walks into an attorney's office or...
Lisa
Maybe a general practitioner...
John
General practitioner...
Lisa
In a small community.
John
And they say, "Well, you know what, I heard if I ever go to the nursing home they're gonna take my house so I want to deed my house to my kids, but I don't want my kids to be able to take it from me, and so the... "
Lisa
And I wanna keep living there.
John
I wanna keep living there. And so, the lawyer prepares a deed where the person grants the property to the kids for example, but the mom or dad, or mom and dad, they retain the right to live and use the property as long as they're alive. A life estate.
Lisa
Yeah, so that's a very basic life estate.
John
Right. And they've given away...
Lisa
The future ownership.
John
The future ownership. And in this case when you've got that future ownership, 'cause even future ownership can be somewhat in dispute. Because if I give that to my kids and it's theirs, then they own that remainder interest.
Lisa
Right. They own that future interest, and they could even sell their future interest.
John
That's right whereas... I've had a kid come in one time and he said, "My mom's will leaves her property to me. So this is basically my property".
Lisa
No, no, no...
John
Because when she dies, I'm gonna get it. And so, I have a right to this property.
Lisa
He was talking he had a present right to the property.
John
Yeah, he was thinking he had a present right, and what he had was a remainder interest, meaning that he presumably would get it but he didn't have a vested remainder interest.
Lisa
Yeah. So long as mom was still kicking, it's not his property and he has no interest whatsoever.
John
And in that circumstance, mom could always change her mind and do a new will. Whereas, the person who has given that life estate where the kids actually own the property subject...
Lisa
In the future.
John
Subject to the life state, they actually do in fact own it. And mom and dad, or mom or dad cannot get that back. So it's all of these intricacies where this stuff starts to cause problems.
Lisa
Right. At first, it sounds so simple. We're just talking about land and owning the house and living in the house but yet, gosh our listeners, probably their heads might be spinning.
John
They might be spinning already. Which, if your head's spinning, then you already recognized that everything else we're gonna talk about about these things are basically going to be convincing you that that should never be a part of your estate planning. [chuckle] But we'll get into the nitty-gritty ugly details of all of that here in just a second because we've got to take a break so stick around.
John
Welcome back to Aging Insight everybody. I'm your host John Ross here with Lisa Shoalmire and today's topic is life estates. Something that have been a pervasive tool or something that has been pervasively used in the past. I hate to call it a tool because it's a tool like a hammer and chisel when there's lasers they can do the job. But, they're still out there, they're still running around. And essentially what a life estate is, is where you have either intentionally via a will or a deed or something, or unintentionally because a statute has taken over but in whatever situation it happens to be, you have a situation where one party has a right to use and occupy, or use and enjoy, something for their lifetime while somebody else actually has an ownership interest in the property that they just can't do anything with because the first person has a right to use it.
Lisa
Right. And John, we see this probably the most frequently and where the conflict comes up the most frequently is in blended family situations where there's a second or more spouse and there's adult children from that first relationship. And maybe the testator wants to make sure the family property goes to the kids, but they want to provide a life estate for after their death for their present spouse so they can continue to occupy the property. And of course, all that does John is set up an immediate conflict when the testator dies about who pays for what, who can do what. It's real easy to say in a will that my spouse will have a life estate in our home that we occupied as our marital home. But who pays the taxes? Who pays utilities? What if the surviving spouse spends six months a year in Arizona with her daughter?
John
And it just sits there vacant.
Lisa
And it sits there vacant.
John
What if it's declining in value?
Lisa
So, that's where all really the conflict comes in. And also John, you were talking about sometimes inadvertently there's a life estate interest that comes along because of a statute...
John
Right. I just finished up a contested probate case. And anybody that knows me knows that as a general rule I do not take contested probate cases. [chuckle] And I have not taken them for some time. So you might be asking yourself, "Well. John, if you don't take contested probate cases how come you just finished a contested probate case?" And that's because this particular contested probate case started in 2006.
Lisa
Right. And at the center of that contested matter was a life estate interest.
John
Right. We had a husband who died and he left a will and he said, "I leave my wife the right to use and occupy our home and contents for her lifetime, and then when she dies I want the property to go to my daughter." And it was basically that simple. Ironically enough, had he not had a will and just died with no will at all, Arkansas Law would have done the exact same thing.
Lisa
Right. It would have been the same result. If he hadn't had a will, the statute would have implied a life estate for that surviving spouse. And John, the public policy for this is that if you're married and you're living in the separate property or non-marital property of one of the parties in the couple and that person, the owner dies, the public policy is we don't want widows and widowers out on the streets with no place to live just because they've suffered this grief of their spouse dying. And so if they had occupied a home as homestead with that now deceased spouse then the law does imply a life estate.
John
That's right. Nine years ago or 10 years ago, when the gentleman actually dies, you say, "Okay, well, it speaks for itself." The wife has the right to live there and the daughter will get it when the wife dies. So, how come I had to mess with this thing at least every couple of months for 10 years? And that's because, think about it, if you're the wife and the air conditioner goes out, do you wanna spend your money putting a new air conditioner in?
Lisa
Or paying the deductible for a new roof?
John
Or paying the deductible for a new roof. It's not your roof it belongs to somebody else's.
Lisa
It's not your house. The insurance?
John
Shouldn't that be the other person? They're gonna get the house when I die, shouldn't they pay for the air conditioner?
Lisa
Yeah, so any upgrades that I make it's just free stuff for them.
John
Yeah. Matter of fact, maybe I'll just sit here with no air conditioning.
Lisa
You're right.
John
And then let the place fall down around me, what do I care? And man, do you have some fights. And we see this all the time. We're gonna talk about some of this. Of course we have to hit our bottom of the hour break, some good news information for you out there, so stick around, we'll be right back.
Lisa
Welcome back everyone to Aging Insight. I'm Lisa Shoalmire, here with John Ross, and we're live in the studio and if you have a question or a comment, you can always give us a call at 903-793-1071. And it could be on today's topic or it could be on something else that you've heard from us, or a situation that you've been made aware of that you just would like to get a little insight, aging insight. How's that, John?
John
I like it. That was smooth.
Lisa
Okay. Well, during the break, John and I were talking about this life estate business and we realized that our most contested matters in the last couple years, and of course John, your case you were talking about lasted for almost 10.
John
Almost 10.
John
Yeah, that's exactly right.
Lisa
Because contested matters cost everyone. I don't care if you're on the right side, the wrong side, the just-trying-to-stay-neutral side, it cost money, financially, emotional toil of dealing with these contested matters, but I thought it was interesting. We had really never looked at it from this angle, but that the contested matters that we've dealt with the most in the past couple of years have been due to this life estate issue. So, of course a life estate is where someone is granted a use of property during their lifetime but the ultimate ownership of the property rest with someone else. Often we see this with a surviving spouse who has a life estate and then children that have the remainder interest or the ultimate ownership. So John, let's talk about this from the standpoint of, with your situation, we had a surviving spouse, a widow who had the right to occupy the residence and the land for as long as she was alive and... Okay, so I understand what occupy means, she gets to live there but what are her other obligations?
John
Well, and so this is where you start getting into... So you've got some that are relatively, clearly established. For example, the taxes on the property, the taxes on the property benefit the current occupier.
Lisa
Right, that's sort of an occupancy expense. You know how it is, taxes come around every year [chuckle] so...
John
That's right, so your property taxes are you're paying for the right to... Essentially that's your cost of living there, you're...
Lisa
Per the county. [chuckle]
John
Per the county, that's right. So typically if you've got the surviving spouse who has the right to live there then that surviving spouse is gonna be responsible for the taxes.
Lisa
And of course, I've had this situation come up where the surviving spouse just said, " Not gonna do it, not gonna pay those taxes."
John
Yeah, just not gonna do it. What are you gonna do about it?
Lisa
And of course the future owners, the ultimate owners, they don't wanna lose the property because the county forecloses on it in a tax situation. So, when one party who should pay the taxes won't, and the other party who shouldn't have to during this time, does usually that ends up in court.
John
And this is where you get, I've got the person in my office they're saying, "Okay John, can we go to court and force her to pay these taxes or force him to pay these taxes?" And I say, "Yes." And they say, "Okay, great let's do it." I say, "Okay, question. How much are the taxes?" "Well, they're $585." "Okay, great." I need a $5000 retainer to take this thing to court to order her to pay $500.
Lisa
Right. And whoa, wait a minute. [chuckle]
John
Well, can we get her to pay that? Probably not.
Lisa
Yeah.
John
So are you willing to spend 10 times the amount of your damages? Or would you rather just pay the 500 bucks?
Lisa
And preserve your property.
John
That's right. And boy that's a hard pill to swallow. So all of that's taxes, but then what about insurance?
Lisa
Well, insurance John, insurance really you could look at it both ways. But insurance ultimately is insuring the value and the buildings and the structures that are on the property to keep them from being damaged, to keep them up, and that ultimately benefits...
John
The remainder holder.
Lisa
The remainder interests.
John
The kids or whoever it happens to be.
Lisa
And so, insurance is something that typically is paid for by those remainder owners, those future owners.
John
Yeah, in fact it's quite clear at least on the Texas side there's been several cases on the issue, and the Texas case law has been very clear that the remainder interest, the insurance benefits them. And the whole idea is if the place burns to the ground you have the insurance that rebuilds it, but that ultimately benefits the people who are gonna ultimately own it, the kids or whatever. But, you think those kids wanna pay the insurance on that place?
Lisa
Well, and what happens when there's a claim? If there's a lightening strike, a fire, a hailstorm? And there's a deductible. There's someone who's directing and choosing the repairs. If we've got a bad fire then we may have to replace the floors, painting, siding, furniture.
John
That's right.
Lisa
Who's choosing that?
John
Well, any of you that have homeowners insurance. Your homeowners insurance probably covers in part your home, but then it also probably covers your contents. Now those contents may belong to, at least some of the contents may belong to the actual occupier. It's stepmom's couch but she's living in the kid's house.
Lisa
Right, where their mom's bureau is in the bedroom.
John
That's right, and the whole thing burns, and here's a thousand dollars for replacement of personal property within the home. Well, if the kids were paying for that insurance...
Lisa
The check's gonna be made out to the kids.
John
Yeah, and they're not gonna buy their step mom a new couch. They don't like her, they've already had problems 'cause she wouldn't pay the property taxes. They wanna keep that money to help them use it for paying property. So you just see how this, and this never stops.
Lisa
No, and that's where you got a 10-year case out of it.
John
Yeah, and people will say, "Well, geez, John, how can you gave a 10-year case?" And it's not because you're litigating one issue for 10 years, it's because the one issue is creating spiderweb issues off of it. Because the first year you've got the issue of the property taxes, but then the next year you have the issue of a new roof, and the year after that you have the issue of the persons not living there because they've moved to live with their daughter for a little while because they've had some health concerns.
Lisa
So now the place is empty.
John
So now the place is empty.
Lisa
Which can be a problem for your insurance. [chuckle]
John
Right.
Lisa
And just a problem generally, crime, break-ins, destruction of property. You don't want somebody realizing the place is empty, and if you're the remainder owner and somebody comes in and cooks meth in the living room of the house out in the country that was your dad's, next thing you know, you've got an abatement issue. [chuckle]
John
Right. What if it's the life estate holder in there, they've had a stroke, they're going to a nursing home. They're never coming back.
Lisa
But yet...
John
And yet...
Lisa
Because it's a life estate and they are certainly still alive, they still maintain the right to occupy that property and at least prevent others, even if they're not there, prevent others, from occupying that property.
John
That's right and what if they wanna rent it?
Lisa
Yeah, or what if they want their granddaughter or niece or nephew to move into the property? [chuckle]
John
And what if the surviving spouse gets remarried? And they move in their new spouse into...
Lisa
Their life estate. [chuckle]
John
Their life estate, and you can... I mean, you could just see there's so many problems with all of this. And all of this has just been talking about real estate. I mean, you can't even figure this out if you start talking about something like a bank account.
Lisa
Right, and I've had that happen and that someone granted a life estate to their surviving spouse in their investment account.
John
Or like you just mentioned a life estate in my car.
Lisa
Yeah, [chuckle] so...
John
What is that? I don't even know what that means? The car's not gonna be... It's gonna be worthless in two years or three years if it's driven at all. So yeah, I mean, you just get lots of problems. So what are some alternatives? Well, we'll give you some alternatives in all of this. You just gonna have to stick around, we'll be right back.
John
Welcome back everybody, and this is your host, John Ross. Here with Lisa Shoalmire, last segment of the day talking about life estates, where you're given property or somebody holds the right to use the property while they're alive, somebody else owns the underlying interest, and this is a bad idea under virtually all circumstances.
Lisa
Yeah, well...
John
That doesn't mean it can't go right.
Lisa
Certainly, but you know, that really takes the intention for everybody to do right.
John
Right. And one of the single biggest mistakes you can make out there is planning for what you hope happens.
Lisa
And not planning for what could happen.
John
Yeah. The whole purpose of planning is for planning on the contingencies that you did not expect to happen. The bad things that could happen. And even when you don't anticipate a squabble among the family members, there can still be a million other situations, even when people get along well, a life estate interest can go wrong. There's too many different things that you're not anticipating with that. So, the first thing in all of this is just don't do it.
Lisa
Yeah, so basically we spent the first three quarters of the program, "Just don't do it."
John
Yeah, to get to the point of 'don't do it.'
Lisa
Like Nancy Reagan, our dear departed first lady would say, "Just say no."
John
Just say no. And if you have one, oftentimes we see these go bad at some point in time in the future. But there was a time where everybody was getting along and it was still working. And if you're in a situation where maybe you have already granted a life estate to somebody or you already have that in your will or you've already done a deed to the kids with a traditional life estate like that, this maybe the time to consider undoing it and going with some other alternative.
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