When I started this blog, I only planned on writing about
technical solutions that we all need in order to protect our Internet devices.
Then as I read Kiplinger's, PC World, USAA,
SemperFi, American Legion and various other magazines it hit me that they talk
about various subjects such as cyber security, identity theft and so on.
If these other publications can cover a broad
range of topics I felt that blogging about subjects such as finance and life's bumps
were perfectly appropriate.
That way my
blog could benefit you technically, financially and mentally.
For example, knowing that you are not alone in your quest to
help your loved ones who may, as in my case, reject everything you advise them
on and may help you cope. As we all move
through life we encounter and try to deal with many situations and finding the necessary
steps in which to deal with these life crises is very important. They are very frustrating as we look back and
understand that the love ones that we tried to help did not give credence to the
information we had provided to them. On
the off chance that you or those that you love will work together to better your
futures together I decided to include some worldly blog entries to benefit you
and your families. There is no reason
for all of us to commit the same mistakes repeatedly, and as a follower of my
blog you need these life stories.
About 16 years ago, I desperately wanted to change careers
and signed up to take all of the necessary classes to sell real estate. As I went through these real estate classes
some of the instructors talked about what the books called "A Lifetime
Lease", which seemed weird to me.
Under what circumstances would you ever want to purchase a property and
then give the owner a Lifetime
Irrevocable Lease? Every single real
estate agent I met during that time owned their parents' house granting them
back a lifetime lease.
As I learned
about this legal arrangement it became apparent that this was a no brainer that
every family needs to do. Therefore, I
put together a package for my parents that described how this works, why it is
important and how my parents were protected.
I then sought out the financing and determined that I could purchase
their house. At that time I was living
pretty well on a very good IT salary and could easily afford to qualify for a
mortgage and purchase their house. My
parents completely ignored the packages, emails and phone calls about the need
to do this and now 17 years later; we are trying to deal with the consequences. I put this blog entry up on the off chance
that your family can learn from my family's folly and benefit from these types
of mistakes.
What is a Lifetime
Lease?
Search the Internet on "lifetime lease" or
"life lease" and you will find an abundance of information. My only reason to blog about this now is that
it currently relates to how my family has backed itself into a financial corner
that is destined to end badly. A life
lease is very simply, a legal document that grants the resident occupation
rights until their death or a crippling life event. It can also be based against another person's
life. It is a deed that reserves a life
estate for a farmer, your parents or some other tenant in which the owner of
the lease cannot revoke as long as the terms of the lease are being met. Upon death, the property reverts to the owner
so you would not want to enter into a "life lease" arrangement with
someone who may wish you harmed. Also as
the leaseholder, you would not want to enter into this arrangement with someone
who may prove unreasonable, not maintain the property, and/or not pay their
taxes or their rent.
Why do you want a
Life Lease?
We often hear about Reverse Mortgages these days, but these
are not in the best interests of your parents, friends or relatives. The best way to get the equity out of your
parent or relatives' house is a life lease.
A "Life Lease" is important for many reasons, if you have a
reasonable family, and God knows I see a lot of drama and unreasonableness these
days, such as in the case of my parents.
This agreement between responsible
parties can be viewed as simply as a matter of estate planning in which to
establish your parents to live on a lease thus conveying their assets to
someone trusted. This means that the
parents have spent down their assets, which are a necessary precursor to
obtaining government benefits. A family
that works together benefits together!
- This is very necessary for Medicaid planning
purposes and a host of other government help that cannot otherwise be obtained. For example, to get Medicaid you do not want the
house in your parents' names, as their equity has to be used up before they
qualify for any government help.
- When the estate is probated the state taxes can
be massive. For example, in Virginia the
executor is expected to provide an inventory of all assets, along with their
estimated value at the time of the testator’s death. In cases where the estate is valued at more
than $15,000, a probate tax must be paid at the rate of 10 cents for every $100
of the value of the estate. Therefore,
it is very important to pass the estate on to your loved ones prior to your
death or loss of health.
Code of Virginia probate
tax and what assets are subject to this?
- Property passing by the exercise of a power of
appointment.
- Jointly held property with right of
survivorship.
- Insurance proceeds payable to a named
beneficiary, other than the estate.
- Bonds payable upon death to a named beneficiary.
- Property that passes by inter vivos trust. (See: https://en.wikipedia.org/wiki/Inter_vivos_trust) We will talk about trusts and the need for
them in a later blog entry.
The tax does apply to property owned as tenants in common,
to the extent of the decedent's interest in the property. The probate tax also applies to property that
is passed to a beneficiary through a will.
In Virginia, the probate estate includes the assets (real property and
personal property) that were held in the decedent's name at death, and those that
pass under the will.
Property passing under a will can become complicated. There can be ambiguity in the laws
surrounding it which may require legal help to navigate. There can also be complications in the
interpretation of the will which will have to be decided by the states courts.
What are the other
considerations before entering into a life lease?
In the scenario above, if the parents want to sell the
house, the kids would have to agree.
After all, it legally belongs to the kids anyway. This is not a big deal because the parents
can always walk away thus leaving the kids holding the bag on the mortgage
payments, which may then force them to sell the house anyway.
The legal agreement between the tenant and the life leaseholder
also has to be very specific as to whom is responsible for what. For example:
- The tenant usually handles the real estate taxes
and pays the rent. However, if these are
not specified in the lease documentation the life estate holder may be held
responsible for these expenses.
- The tenant is also usually responsible for ordinary
repairs, upkeep and maintenance as they become necessary for the preservation
of the property. The remainderman (the person who gets the
property at the end of the life estate) expects the tenant to repair and keep
the property maintained. If the life
tenant is not properly maintaining the property the life leaseholder can
conduct inspections and make necessary repairs, but this may require a court
order.
- A tenant may want to make permanent improvements
or changes to the property. These types
of improvements usually require the consent of the remainderman.
- Homeowner's insurance can be split between the
estate lease holder and the tenant. Just
as a renter is responsible for insuring their belongings, a life lease tenant
can only be responsible for insuring his or her interest leaving the
remainderman with the obligation to insure the remaining interest.
- A life tenant can move out and sublet the
property, which the life estate holder may not want. Any rent that the life tenant receives would have
to be reported as taxable income.
- A life tenant can sell their life lease but all that
the buyer would get is the same interests in the property as the tenant. This interest would expire upon the death of
life tenant.
Glossary:
Decedent - An
individual who has died. The term
literally means "one who is dying," but it is commonly used in the
law to denote one who has died, particularly someone who has recently passed
away. A decedent's estate is the real
and Personal Property that an individual owns upon his or her death.
Remainder - A future
interest held by one person in the real property of another that will take
effect upon the expiration of the other property interests created at the same
time as the future interest.
Remainderman - remainderman
n. the person who will receive a remainder in real property.