Life Estate and Actuary Tables

[Brad Ellis]

Moh,

"It looks like it is a family living trust life estate."

That may or may not be the case here and the appraiser, if they wish to know (not sure it is necessary at all) would have to read the trust document.

The family living trust may or may not create a life estate. They are not cojoined. Now, I only know this because I am literally at the last step of creating these in my family- or more correctly, my lawyer is doing it!

I had suggested the life estate route. My lawyer told me it really was not necessary because when you create the trust itself you transfer ownership into the trust and the trust owns the property. Upon the demise of the trustor, the asset- the trust- passes to the beneficiaries. Typically, the trustor retains control over all this until they die or are unable to make decisions themselves. It is the issue of "trust" that will govern whether or not eh estate meeds to be modified by the trustor.

For example, if the woman intends to leave her property to her son, but does not really trust him completely (sad, but happens), then she can put the asset into the trust and have it grant her the life estate. However, if she does trust her son to do the right thing, then the life estate is not necessary to avoid probate.

That is what we did. Dad's assets into trust, him as trustor and me as beneficiary of the trust and as trustee. I have power of attorney as well. He trusts me to do the right thing and I will. We are not doing the life estate at all. My own family trust eventually grants the same rights and obligations to my daughter.

Brad

 

[KenRossman]

If you or your friend have access to the AI Lum Library, David Keating, MAI, wrote an excellent article about Life estates (excerpted from his book "Appraising Partial Interests" ISBN: 0-922154-49-X) for the 3rd Qtr 1998 Issue of "Valuation Insights & Perspectives".

 

[Fred]

Ken,
I have that article in my folder of life estate articles. I would rate that article as "fair, at best," not "excellent." It leaves far too many significant issues unaddressed and presents an unrealistic solution to the sample problem.

 

[KenRossman]

I guess we will have to agree to disagree...

 

[Fred]

It's probably because I don't use minimal standards to judge things. The fact is that his unit of comparison (10%) is both plucked from air and unrealistic. I "agree" the paper color is "excellent."

 

[Bella Crocheron]

Wow, Thanks for all your input. It looks like my friend has some research to do......Thanks Again!

 

[KenRossman]

It's probably because I don't use minimal standards to judge things. The fact is that his unit of comparison (10%) is both plucked from air and unrealistic. I "agree" the paper color is "excellent."

You undoubtedly know what "opinions" are "like"...

I'll wait with baited breath for your published article and book on the subject...

 

[Fred]

You undoubtedly know what "opinions" are "like"...

Of course. That's why I said it is a "fact" that his yield rate is PFA.

 

[Couch Potato]

Should get you close.

OK. Lets say a man owns a Life Estate property. I believe this is a partial interest in the property. His mother sold the property to him, but she remains the "owner" until she dies. She certainly would not sell the property to him for market value. She would sell the property for market value minus the "loss of value" (because son will not take over property until mother dies) or minus the "loss of value" (son cannot rent out the property because mother is still alive".

This is what I mean when I say "loss of income"

What you are describing is valuing the son's interest indirectly. If you consider son's interest to be the current value minus the value of the life estate, you are describing exactly the process to be used. To directly value the life estate you would estimate the future value at the time the son takes full possession and discount that amount back to today. Measuring indirectly involves only one guess (change in rent over time) while measuring directly requires two guesses (change in property value over time and appropriate discount rate). IMHO the confidence in ability to make the various guesses should determine the method of valuation. Generally the fewer guesses involved the better the quality of the result.

 

[Fred]

To directly value the life estate you would estimate the future value at the time the son takes full possession and discount that amount back to today.

That would be valuing the remainderman interest, not the life estate. (if future value means the future value of the whole property).