It is rather common here in Fairfield Glade and Crossville, Tennessee for a married couple to reside in a home that is the separate property of one spouse.  The owner of the home often wants to leave the house to his or her own children, but at the same time the owner does not want to leave his surviving spouse homeless.  The question then arises:  How do I leave my home to my surviving spouse for life, remainder to my children?

As you might expect, there is more than one way to do this, and each method has its advantages and disadvantages. 

Life Estate

A life estate can be created by the owner during his or her lifetime or can be created at death pursuant to the owner's will or pursuant to a revocable or irrevocable trust.

Life Estate Created by Deed (to Take Effect Immediately)

To create a life estate during lifetime, the owner of the home would usually sign and record a deed conveying the home to his or her children and reserving to himself/herself and to his/her spouse a life estate as to each.  This kind of deed is tricky to draft correctly and should not be attempted without the assistance of an experienced Tennessee real estate attorney or estate planning attorney.

This also should not be attempted without reviewing the impact of the following concerns on your individual situation:

• Gift Tax.  Every financial transaction has consequences. In this case, a gift tax might be due based upon the value of the remainder interest gifted to the children.
  
  
• Recordation Tax.  In Tennessee, a recordation tax in the amount of 37 cents per $100 is due upon recording a deed based upon the actual consideration paid or the value of the property, whichever is greater.  Because the consideration paid in a gift transaction is zero, the value of the remainder interest will need to be determined in order to properly complete the recordation tax affidavit.  To be completely accurate, this might necessitate an appraisal of the property and then a discount would be applied based upon the age of the younger spouse.
  
  
• TennCare (Medicaid) penalty.  In Tennessee, gifts made within five years prior to the date the donor is admitted to a nursing home for long-term care or is otherwise eligible for home and community-based services will cause the donor to incur a penalty period before TennCare will start paying for care.  The penalty period is a number of days determined by dividing the aggregate value of all such gifts made within the five-year look-back period by the then effective average cost of nursing facility care in Tennessee (as published by TennCare).  In 2019 that daily rate was $182.42.  For example, if the value of the gift was $182,420, that gift would create a 1,000 day penalty period.  That means for about 2 years and 9 months the donor would have to privately pay for nursing home care before TennCare will pay.  At approximately $7,000 per month (in 2019), that would be a penalty of about $231,000.  Notice that this is more than the value of the gift.  That is because the actual cost of nursing home care in Crossville, Tennessee is more than the "average" cost according to TennCare.
  
  
• Loss of Control.  After making such a gift, you will not be able to sell or refinance the house without the signatures of all of the remaindermen (your children in this example).  If you want to sell or refinance, the remaindermen would be within their rights to insist that the majority of the proceeds be remitted to them because the value of their remainder interest usually far exceeds the value of your retained life estate(s).
  
  
• Capital Gains Tax Exposure Due to Loss of Step-Up in Basis.  Gifts made during lifetime often result in the donee(s) incurring a hefty capital gains tax obligation when they eventually go to sell the asset because the donee's basis for tax purposes is equal to the basis that the donor had in the asset.  Had the donees (your children in this example) inherited the property instead, the basis would have been stepped-up to fair market value at your date of death (or alternate valuation date, if applicable), resulting in far less exposure to capital gains taxes down the road for inherited assets that had appreciated in value prior to your death.

Life Estate Created by Trust (to Take Effect at Death)

The loss of control during lifetime that results from a gift of a remainder interest made during lifetime is usually reason enough NOT to go that route in Tennessee.  Another option is to make a trust that leaves the house to the children subject to a life estate in favor of your surviving spouse. This should not be attempted without the assistance of an experienced estate planning attorney.  Using simple wording like "reserving a life estate to my spouse" is fraught with peril for both your surviving spouse and your remainder beneficiaries.

This technique eliminates the issues listed above under "Life Estate Created by Deed (to Take Effect Immediately)" but then raises other potential issues:

• Unpaid expenses.  It is not uncommon for the surviving spouse to be unable to keep up with the expenses of ownershhip.  There are many expenses associated with home ownership or occupancy, including without limitation utilities, property taxes, insurance, homeowner association fees, maintenance, and repairs.  There might also still be a monthly mortgage payment.  If is usually assumed that the life tenant will pay these expenses, but do be aware that if the life tenant does not pay them, the life tenant will NOT forfeit his or her tenancy.  The remaindermen might have to pay them in order to protect their inheritance.
  
  
• Other occupants.  The surviving spouse as life tenant will have the right to move move his or her children or a new boyfriend or girlfriend in if he or she chooses.
  
  
• Renters.   The surviving spouse as life tenant could move out and rent the property to strangers.  True, their tenancy would end when the life tenant passes, but then the remaindermen will be put to the burden and expense of prosecuting an eviction case if the tenants do not move out peacefully and voluntarily after the life tenant dies.
  
  
• Vacancy.  At some point the surviving spouse may want or need to move elsewhere (e.g., into a long-term care facility).  The house might end up sitting vacant until the surviving spouse passes, thus subjecting it to the risks of vandalism and general decay.
  
  
• Sale of life estate.  The surviving spouse does have the right to sell his or her life estate.  Granted it is not likely, but if the surviving spouse wants to move elsewhere and raise some money in the process, he or she just might get lucky and find someone willing to take a chance on the surviving spouse's longevity.  That person might or might not maintain the property as well as the remaindermen would like.  Even worse, the buyer might engage in "rent skimming", which is what it is called when a buyer purchases a home subject to an existing mortgage, rents it out, keeps the rent, but doesn't pay the mortgage.  Eventually the house is lost to foreclosure.  There would not be much the remaindermen could do to prevent this, except bring the mortgage current themselves.
  
  
• Practical inability of remaindermen to sell their remainder interest. Just as the life surviving spouse has the right to sell his or her life estate, so do the remaindermen have the legal right to sell their remainder interest.  However, the likelihood of finding a buyer that is willing to purchase the property subject to the life estate is slim.  If the remaindernen NEED to sell in order to avoid foreclosure, for example, they may be hard pressed to do so without the surviving spouse's signature.  However, the surviving spouse may be unable to sign due to diminished capacity.

Life Estate Created by Will (to Take Effect at Death)

It is possible to provide in your will for the creation of a life estate for your spouse that takes effect at your death.  The issues that need to be considered with this technique are all of those listed above under "Life Estate Created by Trust (to Take Effect at Death) PLUS the following ADDITIONAL considerations:

• Probate will likely be required to create the life and remainder estates.  As the saying goes, "Where there's a will, there's probate.  Probate is the court-supervised process by which assets in the name of a deceased person are retitled into the name(s) of the decedent's heirs or beneficiaries.  However, in Tennessee, if the house is the ONLY thing in the decedent's probate estate, then it might be possible to retitle the home by obtaining a court order to record the will as a muniment of title.  This should only be done, however, if the surviving spouse and remaindermen are unlikely to want to sell the house within six years after recordation of the will.  If they are going to want to sell soon, you are back to needing a full probate.
  
  
• Probate is a public process.  The administration of probate estates is a public process.  Regardless of which type of administration is used (common form, solemn form or muniment of title), your entire last will and testament will be made public.
  
  
• Probate is expensive.  Most estate beneficiaries find that they need to hire a Tennessee probate attorney to assist with the probate process.  Probate may not be as expensive in Tennessee as it is in other states, but it is more expensive (and more time-consuming) than trust administration due to court costs, court time and attorney or paralegal time drafting probate pleadings.
  
  
• Probate is time-consuming.  If recording the will as a muniment of title is an available option, that can be accomplished rather rapidly in Cumberland County, Tennessee, where a personal appearance is not required.  In other counties, such a Putnam County, Tennessee, the probate judge requires a personal appearancy by the attorney.  This makes the process slightly longer and more expensive.  Absent eligibility for the muniment of title method, expect the probate process in Cumberland County, Tennessee to take four to nine months or longer.

Right of Occupancy

Right of Occupancy (or Lease) Created by Trust (to Take Effect at Death)

In this author's opinion, the best choice is usually a right of occupancy created by a trust.  (Another option that is sometimes even better is a lease created by trust.)  Usually this trust is revocable during lifetime, but if the grantor wants to ensure that the house does not end up being lost to pay future nursing home expenses, it might make sense to use an irrevocable trust.  The important thing is to make sure that the trust spells out all of the rules so that the important issues are covered and the surviving spouse is not pitted against his or her stepchildren.  This should not be attempted without the assistance of an experienced estate planning attorney. 

With the assistance of an experienced Tennessee estate planning attorney, the following issues can be resolved in the drafting of a right of occupancy created by trust:

• Payment of expenses.  There are many expenses associated with home ownership or occupancy, including without limitation utilities, property taxes, insurance, homeowner association fees, maintenance, and repairs.  There might also still be a monthly mortgage payment.  There is no right or wrong answer as to who should pay them.  The important thing is to think these through and resolve the issues so the surviving spouse doesn't end up fighting with the decedent's children over these issues.
  
  
• Other occupants.  If you want your surviving spouse to be able to continue to live in the house for life but you do NOT want him or her to share the house with any other people (or certain other people), you can spell that out.  Do keep in mind issues such as whether your surviving spouse will be able to afford to maintain the house without renters, and do of course make allowance for bona fide live-in caregivers.
  
  
• Sale or assignment.  A typical right of occupancy cannot be sold or assigned.  This is an advantage over a life estate.
  
  
• What should happen if/when the surviving spouse must move elsewhere (e.g., into a long-term care facility)?  If it's a life estate, the house might end up sitting vacant until the surviving spouse passes. If it's a right of occupancy, you can provide that it ends when the occupant (surviving spouse) vacates, thus freeing up the property for sale by the children.
  
  
• Can the remaindermen sell their remainder interest while the surviving spouse is still alive? What if they need to sell in order to avoid foreclosure?  This issue is less likely to arise with a right of occupancy (and even more unlikely with a lease) because the right of occupancy (or lease) will usually assign the obligation to make monthly mortgage payments and other expenses to the occupant (or tenant).  If the occupant does not pay them, the right of occupancy ends, and the children can sell the house to avoid foreclosure.
  
  

Right of Occupancy (or Lease) Created by Will (to Take Effect at Death)

It is possible to provide in your will for the creation of a right of occupancy (or lease) for your spouse that takes effect at your death.  Keep in mind, however, that will-basd planning carries with it the following negatives:

• Probate will likely be required to create the right of occupancy (or lease) and remainder estates.  As the saying goes, "Where there's a will, there's probate.  Probate is the court-supervised process by which assets in the name of a deceased person are retitled into the name(s) of the decedent's heirs or beneficiaries.  However, in Tennessee, if the house is the ONLY thing in the decedent's probate estate, then it might be possible to retitle the home by obtaining a court order to record the will as a muniment of title.  This should only be done, however, if the surviving spouse and remaindermen are unlikely to want to sell the house within six years after recordation of the will.  If they are going to want to sell soon, you are back to needing a full probate.

• Probate is a public process.  The administration of probate estates is a public process.  Regardless of which type of administration is used (common form, solemn form or muniment of title), your entire last will and testament will be made public.  Most estate beneficiaries find that they need to hire a Tennessee probate attorney to assist with the process.
  
  
• Probate is expensive.  Most estate beneficiaries find that they need to hire a Tennessee probate attorney to assist with the probate process. Probate may not be as expensive in Tennessee as it is in other states, but it is more expensive (and more time-consuming) than trust administration due to court costs, court time and attorney or paralegal time drafting probate pleadings.
  
  
• Probate is time-consuming.  If recording the will as a muniment of title is an available option, that can be accomplished rather rapidly in Cumberland County, Tennessee, where a personal appearance is not required.  In other counties, such a Putnam County, Tennessee, the probate judge requires a personal appearancy by the attorney.  This makes the process slightly longer and more expensive.  Absent eligibility for the muniment of title method, expect the probate process in Cumberland County, Tennessee to take four to nine months or longer.

If you are thinking about how to leave your house to your children without leaving your surviving spouse homeless, we can help you choose the best structure for your circumstances.  Call our Crossville, Tennessee office anytime at 931-250-8585 to schedule an appointment to discuss your estate planning needs.