March 26, 2014
What is a life estate?
A life estate is a conveyance which grants the life estate holder, the life tenant, the ability to live on the property for the duration of their life. This type of conveyance offers control to the donor because they can restrict the life tenant's use of the property. For example, the donor can require that (1) the life tenant remain a continuous occupant of the property for their life and/or (2) require the life tenant to pay all taxes and maintenance associated with ownership.
The following illustration demonstrates how a typical life estate arrangement works.
In the 1990s, John Doe, a widower, owned 650 Rosewood Court Los Altos, CA 94024. John decided that he wanted his only son, Jack Doe, to own the property albeit in a life estate form because Jack was largely irresponsible. Jack had a penchant for unsuccessfully gambling on English Premier League soccer matches. He insisted that he only picked "winners" but alas lady luck was not on his side. Naturally John worried that Jack might sell 650 Rosewood Court to fund his gambling habit. Since the property was quite lucrative, a large infusion of cash from the sale could cause Jack to gamble an outlandish amount of money at casino sportsbook in Las Vegas, NV.
John executed a deed in 1992 which granted a life estate to Jack and the remainder to his cousin Carl Walcott. The life estate required that Jack maintain the property's upkeep and continuously occupy the home as his primary residence. If Jack failed to perform either requirement, title would be transferred to Carl immediately. Since the life estate conveyance from John to Jack involved a parent to child transfer, such was not subject to real property tax re-assessment. This was especially important to Jack because the property taxes were quite modest given that John purchased the house with his late wife Jane in 1944 for a small sum. Hence Jack was able to enjoy a low property tax base and the corresponding property taxes were quite manageable.
Sadly Jack succumbed to his insatiable gambling habit and decided to move to Las Vegas permanently. Spurred by fantasies of instant gratification and enormous wealth, Jack's temptations over-whelmed him. This caused the termination of his life estate because John required that Jack continuously occupy 650 Rosewood Court. Therefore when Jack signed a lease to rent an apartment in Las Vegas, his life estate for 650 Rosewood Court was terminated. A termination of life estate was then filed with the Santa Clara County Recorder's Office . This transfer did result in a real property tax re-assessment because there were no exclusions that apply to the transfer of real estate between John and Carl.