One of the most important and complicated aspects of a divorce proceeding is dividing marital property, which may include property subject to a life estate. Divorces are subject to the law of the state where the proceeding is taking place, so the process of dividing up property will vary.
Life Estates Defined
When a life estate is granted, a property owner grants someone the right to use the property for the rest of his life. The recipient is known as a "life tenant." After the life tenant dies, the property is automatically transferred to another party chosen by the original owner when the asset was first conveyed. The person who gets the property after the life tenant is known as a "remainderman." The benefit of a life estate is that it grants a life tenant the right to use property but not the right to bequeath it or sell it.
Read More: Life Estate Laws
Separate property, in terms of divorce, is composed of those assets that were acquired outside of the marriage and therefore not included in the marital estate. Assets that are typically excluded from the marital estate are properties acquired before the marriage and properties given to one spouse exclusively by a third party through a gift, bequest or inheritance. All other property is typically included in the marital estate and subject to division.
Separate Property and Life Estates
Whether a life estate would be considered separate property or part of the marital estate depends on how a spouse received the property right. If a spouse had the life estate prior to the marriage, or if one spouse was given the life estate as a gift or inheritance from a third party, it would be separate property. If the life estate was given to the couple, it would be included in the marital estate. If the life estate was created by a spouse from property acquired during the marriage, it is not separate property and must be included in the marital estate.
Community Property Vs. Equitable Distributions
Nine states recognize community property laws: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. All assets that are in the marital estate are equally divided amongst the spouses.
All other states are equitable distribution states. Instead of dividing up the marital estate 50-50, a divorce court will consider both spouses' personal and financial factors and adjust the distribution accordingly. This is to ensure both spouses are able to maintain their standard of living after the divorce. While separate property is not included in the marital estate, it can influence how the marital estate is divided.
Dividing the Life Estate
If a life estate is included in the marital estate, it is subject to division. If one spouse wants to keep the life estate and can afford to "buy out" her spouse, she can pay him an amount equal to 50 percent of the life estate's value. There are certain ways to calculate the life estate's value, depending on your age and the property value. For example, in Washington State, a 50 year old's value in a life estate would be about 85 percent of the property's market value. If the home were worth $100,000 with no mortgage, one spouse could buy out the other for about $42,500, or half of $85,000. Alternatively, the life estate can be sold and the proceeds divided between the spouses. It is important to note that only the life estate itself can be divided or sold.
John Cromwell specializes in financial, legal and small business issues. Cromwell holds a bachelor's and master's degree in accounting, as well as a Juris Doctor. He is currently a co-founder of two businesses.