Life Estate -- Has Anyone Done It?

greenspun.com : LUSENET : Countryside : One Thread

Someone has offered to buy my property with a life estate clause: I would be able to continue to live on the property and use it as I have been until I die, meanwhile getting a down payment for it and collecting monthly payments.

I figured what the property is worth, then I deducted 25% for the life estate clause (for being able to live on the property). I figure on going with 15 year terms in carrying the note. If I die before that, they come out ahead. If I live beyond 15 years, I come out ahead.

My question: is there any set guidelines used in determining how much of a discount you should give off the market value of the property in setting the value of a life estate? Is 25% too low or too high? Or do you have to discount it at all?

Thanks much in advance.

Bruce

-- bruce (rural@inebraska.com), January 17, 2002

Answers

Gosh Bruce, the only time I've ever seen property deeded with a life estate is for example; a parent dies and leaves the property to the kids instead of the spouse (usually in re-marriages) and deeds the spouse a life estate to the property. Market value didnt' play into it.

-- CJ (cjtinkle@getgoin.net), January 17, 2002.

Hi Bruce

You must, I repeat MUST, get thee to a good attorney who specializes in probate and related real estate.

Who did your wills, handled your property purchase? Were you satisfied? Make an appointment and set the situation in front of him/her.

You stand a VERY GOOD chance of not only denying yourself a comfortable last few years, but also lOSING EVERYTHING way before then!!

I'm not being hysterical or over-reactive here, simply concerned because I've seen it happen and I'm only too aware of the pitfalls.

Your prospective purchaser may very well be on the up&up, just as well NOT be, or as ignorant (mean that in a nice way) of the law as he/she is OR NOT.

Just my opinion, having worked in the legal field for a LONG time (in probate, almost broke my heart, finally had to get out of it)

Good luck, let us know how it turns out.

-- Michaela (flhomestead@hotmail.com), January 17, 2002.


There was a very famous case in France recently of some guy buying a Left Bank place from an older woman. She outlived him! That is one drawback of a private party buyer life estate, unless the buyer has heirs that will get the property at some point.

Bruce, you can do the same thing with a reverse mortgage at a bank. Market value has nothing to do with it.

-- GT (nospam@nospam.com), January 17, 2002.


I should say that you don't need to discount for the fact that you are still living there. I am not sure you need a lawyer--unless you typically use lawyers for real estate transactions where you live, not all states do. It is not really a probate thing except for personal property, and you'd use a "pour over" type will for that, like you would with a trust.

I am assuming you have no one to leave this property to, or you know that no family member is interested in buying you out? Actually, you might want to consult with a CPA on this for tax implications, if any.

-- GT (nospam@nospam.com), January 17, 2002.


I had a nephew who bought a farm from an older widow and gave her a lifetime estate. He was not a good person. In a few years he got impatient with the fact that she was still living and appeared to be gonna live a long time.

A day at a time, a stunt at a time, he made her life unbearable enough that she moved out. Never did anything illegal or blatently ugly, but he edged her out of there.

The older we get, the more vulnerable we become to someone who does not have good intentions - or who started out with good intentions and has a change of heart. It would be hard to interact with someone who you know, is a little ticked off because you haven't died yet.

Proceed carefully. homestead2

-- homestead2 (homestead@localnetplus.com), January 17, 2002.



Hi Bruce,

I'm originally from Nebraska. I'm also a remainderman in my grandfather's estate for some farmland.

I'm sure you know there are legal limitations as to how long property can be tied up in life estates. You didn't mention whether your property was a house with land, a house alone, or only land, but in your case 15 years won't be a problem. I'll make the assumption you're talking about a farm.

What confuses me about your question is why a discount is needed at all? As I understand your question, you own the place, someone else is willing to buy it, and they'll let you live on it until you die? Why is there a need for a discount, given the value of your land will certainly rise over the next 15 years. And, it may really go up depending on where you're located. Also, you'll be living on the place, keeping it fixed up and maintained, and so on. That's valuable to the new owner because he won't have any landlord expenses. Also, chances are if you are way out in the sticks, the new owner might not be able to rent the house anyhow. As you know, there are a lot of empty farm houses all over Nebraska.

As to discounts on valuation, that's a loaded question. To my knowledge, there are no set discount rates for land sold with life estate provisions. Estate executors and attorneys might have more insight on that point. I'm neither a realtor nor a lawyer, but as a practical matter it seems to me like there is way too much variation in land values over uncertain periods of time to establish any typical discount structure.

The main issue looks to me like one of market valuation over time. Annual land productivity and government subsidy programs might also play a role here if you are selling crop land. But I return to the question of why it's necessary to give any discount in the first place? If it's because you want to sell the land and the buyer thinks he's getting a good deal with a discount, and he'll let you live there until you pass on, then set the price per acre high enough to cover the expected value increase over the next 15 years and go ahead and give the buyer some kind of discount.

I'm guessing you want to receive regular annual payments for the next 15 years and not have Uncle Sam take half of it in taxes in addition to the taxes taken by the folks in Lincoln. Other things like medical costs, nursing home expenses, etc. enter into you decision depending on your age. You might give some thought to setting up a trust to receive and handle annual payments in the event you get feeble.

As you probably know, in Nebraska, farmland valuation has increased slowly over the last 40 years. The ups and downs of farming has seen prices per acre all over the map. I had a man tell me that a particular piece of ground eight miles off the Missouri River sold at auction for $400/acre, while the market value survey for the land at the time was actually $1,700/acre. As they say, Go Figure. Nebraska farmland pricing is also stongly influence by location within the state and the ability to irrigate the land.

Dry land located West of Grand Island, Cozad, or North Platte generally have diminihing value the further West you go in the state. Some of the Sandhill ground has even lesser value. East of York and Lincoln, the values are higher because the land is usually more productive and land within 25 mile of Omaha or Lincoln have become prime because of access to the cities.

Of course there are isolated exceptions, especially where someone moving out from the big city, with suitcases full of money, will pay whatever is asked and think they got a bargain. Here in Central Virginia we bought our farm seven years ago for $1,200/acre. Nice location, with house and so on. My brother told me I was nuts. He might be right. A few months ago, 80 acres directly across the road from me sold for $2,300/acre and the first thing the new owner did was put in a $50,000 pond, a $50,000 board fence, built a $40,000 barn, drilled a real deep well and he hasn't even started on his house that will probably exceed $1M. For some folks, money is no object.

The locals here both love and hate the inflow of Yankees, but readily take their money. Lots of immigrants from New York and New Jersey with huge wads of cash in their pockets. Not unlike the carpet baggers after the Civil War, except now the Southerners are in control. It's fascinating to watch the theater of it all. In the end, the only benefit I'll probably get out of all the local activity is higher property taxes. Sorry to digress.

UNL conducts an annual(?) survey of Nebraska Farmland Market Values. The last one I have was done in 2000. The website address for the survey report is: http://agecon.unl.edu/realestate/re2000.pdf Previous issues can be found at: http://agecon.unl.edu/realestate/www.ianr.unl.edu/agecon/realestate/re (year).pdf

or

http://agecon.unl.edu/pub

If I were you, I'd decide what I thought was a fair price for my land based on a combination of the UNL market survey data; what surrounding properties have sold for in the last couple of years, and what a real estate assessment said the place is worth. I'd also factor in what the annual production rates have been for the last ten years.

If I were the buyer, I'd do exactly the same thing so that I fairly well know what I paying you and what the property is actually worth and what the ground will generate in annual income. In the lingo of a Nebraska farmer, I want to see if it'll "pencil out." If the buyer intends to farm the place, do you have provisions in the contract in case he goes under? Of course, I'm assuming here that you plan to take annual payments and not all the cash up front.

I'd look at the rate of land value increase around me for the last 15 years and project that rate forward. If you're in/around Omaha, Lincoln, GI, Columbus or North Platte, then you may have to make some adjustments to fit the local market.

At the end of the day, I'd put forth my price to the buyer. If he wanted a 25% discount on my $100,000 valued property and would let me continue to live there, I'd probably offer it to him at $125,000 -- but all that does is drive up costs for both of us.

If both of you and the buyer understand the basis for the final price, then there may not be any need for a discount. You both know where the numbers came from.

I'm a Cornhusker by birth and a Virginian by choice. Nebraska is a great place to be from. You gotta be "from" somewhere.

Take care and I hope this helps.

Regards, Ed



-- Ed (ecpubs@lynchburg.net), January 17, 2002.


Ed, what's the point of a life estate if there are limitations on it? Are you talking only about how long the mortgage can be for, or would you have to move if you lived beyond the mortage length???

I think the woman in France from my earlier post lived to her 90's or something like that.

-- GT (nospam@nospam.com), January 17, 2002.


Thanks all for your great input.

Here are a few more facts concerning this proposal:

The person wanting to do this already owns one of the two houses on my land, along with a little acreage, which I sold to her. I've known this person over 20 years and underhandedness is not within her.

The land is basically mostly grazing land and is appreciating in value.

I don't think I would owe any taxes on this transaction since it would be my one-time tax free property sale.

I enjoy living on the place and the arrangement would solve my financial situation as well as allow me to remain here as long as I can. (The place is paid off).

-- bruce (rural@inebraska.com), January 17, 2002.


I offered to buy 10 acres ajoining me from the man that owned it and offered him the option on using the land untill his death. He needed extra money coming in each month and what we did was discount the price of the land by the interest I would normally recive for a loan if I loaned him the money because that was in a sense what I was doing. We prepared the papers and everything and was going to sign but his son in law wanted his attorney to look them over also, which was fine with me as the man I was buying the land had his attorney prepare the papaers and My attorny had looked them over so what the heck. Took his attorney two weeks to get around to looking over the papers, during the time the man had a stroke, is in a nurseing home and the land will be sold some time down the road to pay the home. Now the son in law wants to know if I can figure some way we can still do the transaction but its out of our hands and nothing can be done. The payments would have paid his nurseing home bill for at least ten years probably more but not now. I will or rather my wife will probably sell the farm at some future date on a life estate type of sale. They really work well when there is really no one that you want to leave things to. At the sellers death any balance can be paid off or payments continued to the heirs. Neither me or the wife have family that would like to live on the farm but they all enjoy money.

-- David (bluewaterfarm@mindspring.com), January 17, 2002.

David, the situation you describe might have been avoided if the man had maybe transferred the property to his son-in-law earlier (I think it is three years or so for medicare) if he knew his health was fragile. Unless of course the family wants him in a private pay nursing home. If they had wanted to still keep the property they could have cared for him at home for the 3 years or so (I am assuming there was no spouse in the picture). People I know have also said that once you go into a nursing home on medicare don't expect to last very long (although it also depends upon how often you visit and check up on the home too).

And, it depends on the cost of private pay nursing homes. In CA for example, friends were paying close to $4000 a month on private pay, so a normal average house wouldn't pay for a very long stay.

-- GT (nospam@nospam.com), January 17, 2002.



NO DISCOUNT!!!! You are maintaining the house, etc.

-- Rose (open_rose@hotmail.com), January 17, 2002.

GT

A life estate inheritance that comes through a Will frequently has conditions and limitations in order to protect the property for the remainderman. The person creating the life estate is the one who sets the conditions and limitations at the time the Will is prepared. If my dad were able to gamble away my property during his life estate, I probably wouldn't be too pleased since in point of fact I am the designated title holder at the end of his life. He has the "use" of the land -- I "own" it. I'm grateful that such protections are afforded the remainderman. The life estate on my land is different from the one that Bruce is talking about, because Bruce's life estate is only for the duration of his own life and there is no remainderman.

Ed

-- Ed (ecpubs@lynchburg.net), January 18, 2002.


Thanks Ed, I had been confused because I was thinking of the life estate/reverse mortgage as it applied to people who had no survivors to leave anything to.

-- GT (nospam@nospam.com), January 18, 2002.

Moderation questions? read the FAQ