Definition: Reserved Life Estate

From ConservationTools.org

The ownership of real estate can be divided into present and future interests. This division enables a landowner to convey land to a land trust or government with the owner retaining ownership during the owner’s lifetime or some other specified period. Donation of future interests can result in tax benefits.

Summary

The ownership of real estate can be divided into a present interest (called a “life estate”) and a future interest (called a “remainder” or a “remainder interest“). The division is effectuated, unconditionally and absolutely, by delivery of a deed that includes a clause reserving to the transferring owner (sometimes called the “grantor“) ownership of the land for the term of the reserved present interest. Reservation of the present interest allows the owner to retain ownership for a period of time measured by the life of one or more individuals, by a term of years, or by a combination of the two.  The transferee owner identified in the deed (sometimes called the “grantee“) holds the remainder interest — the ownership interest that immediately begins when the life estate ends.

The transfer of the future interest can occur via gift or a sale by the landowner and can be an important tax and estate planning tool. The donation of a personal residence or farm subject to a reserved life estate can result in a federal income tax deduction. If appropriate, coupling this with the donation of a conservation easement may provide additional tax benefit as well as permanent protection of conservation values.

Track Record

The division of ownership of land into present and future interests has been recognized for centuries and is effectuated by delivery of a deed granting the property to the conservation organization while reserving to the grantor ownership for the agreed upon term.   

Typical End Users

  • Owners who want to make a gift of their land to a land trust or government (either, a “conservation organization”) but don’t want to part with it during their lifetimes.
  • A taxpayer who can benefit from the deduction of the net present value of the remainder interest in the personal residence or farm donated to a conservation organization.
  • A conservation organization that is willing to postpone taking full possession and control of a parcel but wants absolute certainty of irrevocable ownership upon the expiration of the term of the life estate.

Conservation Impact

  • The conservation organization can prepare for future ownership that is absolutely certain to occur after passage of time. Testamentary gifts are less certain — wills can be changed and contested.
  • Both the present owner and future owner have a vested interest in the land.They can, by agreement, set standards for conservation of natural and scenic resources within the property during the life estate. 

What You’ll Need

  • Meeting of the minds between owner and conservation organization as to their respective rights and responsibilities during the term of the life estate; standards of care to be observed by present owner; remedies of future owner if present owner fails to conform to agreement.
  • Legal assistance preparing the deed with reservation of present interest and the agreement between present owner and future owner as to their respective rights and duties (if any) during the life estate.
  • Owners must seek competent tax advice so as to achieve the desired tax benefit in conformity with the guidance provided in Reg. §1.170A-12.

Obstacles and Challenges

  • Although owners may highly value the right to enjoy their land for the rest of their lives, a life estate interest is difficult, if not impossible, to sell or mortgage.  Actuarial tables can estimate life expectancy but the present owners can die at any time and, when they do, the life estate interest simply disappears.
  • Likewise, the conservation organization, as future owner, must take into consideration that the burdens, as well as the benefits, of ownership free of the life estate will fall to the conservation organization immediately upon death of the owners, which can happen at any time without warning.
  • Unless otherwise agreed, the present owner owes no duty to the future owner to pay taxes; provide insurance, maintenance or repair; conserve natural or scenic resources or do or refrain from doing anything other than committing waste. These issues can be dealt with in a life estate agreement.

Read more and learn about other conservation tools here

Definition: Reserved Life Estate
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