How selling your house and taking back a LifeTime Lease can benefit your family.

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?

In whichever state you may live or have been named an executor in you will need to study the probate laws.  Some of the following was taken from http://www.tax.virginia.gov/site.cfm?alias=Probate as to which assets are not subject this tax.

•  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.