How Is a Life Estate Percentage Calculated?

A life estate is a legal arrangement where a person (the “life tenant”) has the right to use and occupy a property for the duration of their life. When that person passes away, the property automatically transfers to another person or group of people (the “remainderman” or “remainder beneficiaries”).

When a property with a life estate is sold before the life tenant passes away, determining how to split the proceeds can be complex. There isn’t a simple, fixed percentage that applies to all situations. Instead, the division typically depends on several factors:

Key Factors in Determining Percentages

• Age of the Life Tenant: This is often the most significant factor. Generally, the younger the life tenant, the larger their share of the proceeds, as they are expected to have a longer period of enjoyment of the property. Conversely, an older life tenant would typically receive a smaller percentage.

• Life Expectancy Tables: Actuarial tables (like those published by the IRS) are often used to estimate the life tenant’s remaining life expectancy. These tables provide a statistical basis for valuing the life estate.

• Fair Market Value of the Property: The total sale price of the property is the basis for the division.

• Interest Rates/Discount Rates: To calculate the present value of the life estate, an interest rate (or discount rate) is applied to the estimated future benefits the life tenant would have received.

• Any Existing Agreements: The original document creating the life estate might specify how sale proceeds are to be divided. This is the first place to look.

• Improvements Made by Either Party: If either the life tenant or the remainderman made significant improvements to the property that increased its value, this might be considered in the distribution.

• Legal Fees and Selling Costs: These costs are typically deducted from the gross sale price before the remaining proceeds are divided.

Because of the various factors and the technical nature of the calculations, it is highly recommended to consult with legal and financial professionals in your area. For one, find a qualified attorney near you; they can interpret the life estate document, understand state laws regarding life estates, and draft the necessary agreements for the sale and distribution of proceeds. In addition, a financial advisor can assist with the valuation of the life estate and the application of actuarial tables and discount rates. Attempting to calculate the percentages without professional guidance can lead to errors and potential disputes.