LIFE ESTATE VERSUS TRUST – a trust is almost always preferable to a life estate

1.    Legal possession and control or property

a.    Life estate – life tenant has legal possession and control of the property for life.  The property is worth only the value of his life-estate interest.
b.    Trust – trustee has legal control and the beneficiary has beneficial interest.

2.    Reasons trust is preferable to life estate

a.    More flexible,
b.    Law will provide parameters of trust if trustee’s powers are not adequately spelled out,
c.    None of the problems with life estates listed below.

3.    Problems with life estates

a.    No power to sell fee simple, except through a court order.  This is expensive.  If life estate contains a provision to sell the property, this becomes a general power of appointment (hereinafter GPOA).  Now, proceeds are includible in his estate, defeating the purpose of a life estate.

Instead, have life estate document put any sales proceeds in trust for life tenant, with remainder to original remaindermen (must be spelled out).

b.    Property cannot be mortgaged by life tenant, unless all remaindermen sign.  This may be impossible, e.g., some remaindermen are as yet unborn.

c.    Life tenant cannot lease beyond his life.  This can be overcome by giving life tenant the power to lease for extended time; otherwise may be impossible to rent premises.

d.    Waste – life tenant cannot waste, e.g.:

(1)    Take oil out
(2)    Chop timber
(3)    Take down still usable building

Giving life tenant power to waste may look like a GPOA.

e.    Expenses – life tenant has duty to pay taxes and keep the property in repair, but only to the extent the income from the property is adequate to do so

(1)    Duties
(a)    Property Taxes
(b)    Mortgage interest (but not principal)
(c)    No duty to insure