Nevertheless, there is great value for the original owner. He has the free use of his home as long as he lives PLUS he gets paid for it. It’s like having your cake and eating it too. Only you don’t get as much cake as you otherwise might get. Life tenancy is most often used in family transfers and can avoid certain estate taxes and the whole issue of probate on the real property. It sidesteps a will.
The subject of a life tenancy requires some thinking beforehand. Afterwards is too late. If the homestead is subdivided with only one part sold, this all becomes a moot point. Failing this, there are questions generated that must be addressed:
Who pays the taxes? Normally, when homes only are involved, it is the old owner. In the case of a farm where only the home and prime site are involved, it would most likely be the new owner and he will have to realize that he is paying taxes on something he can’t use - not yet. He has to feel that the value he is receiving makes this worthwhile. To try to divide the taxes up fairly between old and new owners would be a difficult task. A fair way to avoid these difficulties would be to legally separate the home and it’s prime site and let the old owner assume taxes there, with the new owner paying taxes on the rest. This involves some additional tax burden as there will now be 2 prime sites and someone will have to pay the cost of doing the subdivision.
Maintenance: Who does what? The new owner would of course be responsible for anything for which he has immediate use. But would he repair a home that he intends to raze later? Only reluctantly. If he intends to eventually rehab it and rent it or use it himself, then he might be more willing to do necessary maintenance. In that case, he might do better work than the old owner would do. The old owner has only the concern that the home must make it through his lifetime. His repairs might not suit the new owner. And then there is lawn care. What happens when the old owner is no longer able to care for his grounds?
Use of the immediate grounds: What happens when the old owner parks his car, inhibiting access to fields? Or when the new owner parks machinery in spots the old owner still wants to use? Or when feed is spoiled, in the way or manure is accumulating? Or, worse yet, when dead animal bodies start appearing?
Suppose the new owner decides to mortgage the property, sells it or loses the property in foreclosure? The second new owner would be bound by the same rules that bound the new owner. But the second new owner and the original owner may not share the same life experiences that made the new owner and the old one able to work out differences as they arose. In the case of a mortgage, his options will be limited as many lenders will not be interested in involving themselves with such a situation. And one that will could be expected to hedge his bets and lend less than he might otherwise lend.
Medicaid Claims? Generally, the property needs to be in the new owner’s name for 60 months prior to the Medicaid claim. This can lead to gnarly situations. If within this period there is an expected need for a Medicaid claim beyond the old owner’s liquid assets, it is not a good idea for the new owner to enter into a life tenancy situation with someone.
When does the life tenancy end? When the old owner dies, or when he permanently vacates the premises (ie - goes to a nursing home, a relative’s, the hospital)? And how do you define “permanently vacate”?
Can the old owner rent part of his home or the premises to another party? Who gets the income? Can the old owner give all or part of his tenancy to another party? (It would end upon the death of either, which first occurs.)
Does the new owner have recourse if the old owner lies waste to the premises? Yes, he does, but can he enforce it? Many older folks do no want change in their lives, and this can include remodeling. And they may not even notice when things start falling down around them. And, if they do, they may not feel up to dealing with it.
Tax Considerations may be many and can be used to benefit one or both parties. It is recommended that anyone consult a tax professional before entering into such an agreement.
One of the inherent problems is that the part of the property for which the old owner has tenancy is really neither wholly his, nor is it wholly the new owner’s. If they get along, they can work things out, but if they don’t - watch out for hard feelings. You had best know who you are dealilng with, and know them well.