Life estates?

[Craig Sewell]

I have a 127.5 acre farm to appraise to settle an estate. Date of death/effective date is 01/24/2002. My problem is there is a life estate on the entire property. The gentleman that has the life estate is 57 years old, if that is meaningful. Lacking a large amount of comparable sales sith similar life estates, how would you determine what impact (and how much impact) this life estate has on the market value of the subject? Would capitalizing the rent for his expected life span be reasonable? Please help if you can. Thanks!

 

[Restrain]

First question: does the life estate cover the whole acreage or just the home? If it's the home, then the loss is the capitalized rent. If it is the entire property, I would suggest the following:

Estimate the market value of the land and the home, and look at the underwriting tables for life expectancy, given the age of the man. That should give you a reasonable period for which the property cannot be used. Look carefully at any improvments. If you have a life expenctancy of 78 years, for example, that's a 25 year life. The gentleman who has a life estate is not going to maintain a home that he doesn't own beyond what it takes to keep it going. You can assume a minimal remaining value for the improvements. The value of the land at reversion can be estimated by using the Present Worth of $1 table. Look at long term bond rates, gaze in your crystal ball and estimate a 'safe' rate. Then use the Present Worth of $1 at X Years to apply a reversion factor. For example, if the land is worth $100,000 today and you forecast an overall safe rate of 7% over the 25 years to reversion, the factor is .016581. $100,000 x .016581 gives a current value for the land of $1658. As the estimated period to reversion decreases, the value to the property owner increases because the time to when the property can be used decreases.

In summary, given that the man has a life estate on the overall property and is relatively young, the value of the land to the person actually owning the property is very minimal.

 

[Austin]

I agree with Rstrahan: I sold a farm once at auction in which the seller had purchased the farm giving the former owner a life estate in the home place. The former owner’s name was Skin Davis. Old Skin and his wife were sitting on the front porch the day of the auction. When I told prospective bidders about the life estate, they all wanted to take a look at old Skin and his wife to see how much longer that might last. Talk about cold! :roll:

 

[Nancy in Friday Harbor]

Craig,

The IRS has several publications concerning appraisals for an estate and also appraisals of property with a life estate. There are published actuarial tables, interest rates & reversionary rates that the IRS publishes and accepts. Check these out -- don't just "estimate".

Nancy

 

[Anonymous]

Right-o and often the actuary table will ask if the person is a smoker or non-smoker.

 

[airphoto]

This might rate it's own thread, but I'll add it here for discussion. Totally new question, but I've yet to be subjected to this circumstance and will bow to the greater experience available on the forum.

Situation: 2-family home in poorer section of the City of Amsterdam (aka: Pity of AmsterDump, or just "The Dump.")

Mother assumed room temperature in October. Uncle has absolute life estate to upper unit (no obligation to contribute to operating expenses, taxes, etc.) Daughter #1 in residence in lower unit, Daughter #2 in dispute ..

Uncle is 74 years old, w/table life expectancy of 13.2 years. Rents limited by poor economy, poor reputation of Pity, etc., to less than $300/month .. taxes and user fees exceeding $2,500/year (plus insurance.) No existing financing.

Probable fair market value excluding encumbrance of life estate to be under $30,000.

Appears to me that the cash flow will be minimal or negative for (the presumed) 13.2 years, with minimal positive amount following that .. and that the 'net present value' of the cash flows may not be positive ..

What is the generally acceptable method and technique for reporting this?