Minnesota Life Estate

Minnesota Life Estate – Freehold Estate

A Minnesota life estate is a freehold estate that is held by a life tenant for the tenant’s own life, or the life or lives of one or more other persons.

The typical real estate transaction creating a Minnesota life estate contemplates a property owner conveying the fee title interest to a third-party, and reserving to the grantor a life estate.

If such a conveyance is made to a person for a term of that person’s own life or for that of another, the grantee of the interest is referred to as a life tenant.

Creating a Minnesota Life Estate

The operative language necessary to create a life estate would be words such as to the life tenant for his or her life, and upon the death of the life tenant, the remainder shall be enjoyed by that person’s heirs, or certain identified persons.

First & Am. Nat’l Bank v. Higgins, 208 Minn. 295, 293 N.W. 585 (1940).

Benefits of a Minnesota Life Estate

Minnesota life tenants share the exclusive possession and control of the real property between themselves during their joint lifetimes.

Minnesota life tenants also have the exclusive right to receive the rents and profits from a property subject to a life estate, even if they no longer reside on such property.

Rights and Duties of a Minnesota Life Tenant

Minnesota courts have found that there is a community of interest and a community of duty between a life tenant and the holder(s) of the remainder interest, which creates obligations and duties between them.

Hall v. Hall, 173 Minn. 128, 216 N.W. 798 (1927);

Turner v. Edwards, 207 Minn. 455, 292 N.W. 257 (1940).

The community of interest and community of duty are comparable to such interests and duties between cotenant owners of real property.

Hall v. Hall, 173 Minn. 128, 216 N.W. 798 (1927).

Minnesota Life Estate; Quasi-trustee

A life tenant has been identified by Minnesota courts as a quasi trustee, because the life tenant cannot injure or dispose of the property to the detriment of the holder of the remainder interest.

Beliveau v. Beliveau, 217 Minn. 235, 14 N.W.2d 360 (1944).

By reason of his or her role as a quasi trustee, a number of Minnesota judicial decisions have found that it is the duty of a life tenant:

to make necessary and reasonable repairs to the property which is subject to the life estate,
to pay current property taxes with respect to the property which is subject to the life estate,
to pay insurance with respect to the property which is subject to the life estate,
to pay interest on any outstanding mortgages with respect to the property which is subject to the life estate, and
not to permit waste to occur on the real property which is subject to the life estate.

M.S. Section 501C.1113; M.S. Section 501C.1114.

Minnesota Life Estate; Waste

The Minnesota Supreme Court defined “waste” to be

any unlawful act or omission of duty on the part of the tenant which results in permanent injury to the inheritance.

Whitney v. Huntington, 34 Minn. 458, 462, 26 N.W. 631, 632 (Minn., 1886), citing Title, “Waste,” Whart. Law Dict.; Abb. Law Dict.; Bouv. Law Dict.

Special Assessments and Capital Improvements

On the other hand, it is the duty of the holder the remainder interest to pay for any special assessments and capital improvements to the real property which is subject to the life estate.

M.S. Section 501C.1113; M.S. Section 501C.1114, Subd. 2(c).

While a life tenant in possession of real property must make such ordinary repairs as are necessary to preserve the property, the life tenant is under no duty to improve the property.

Rendahl v. Hall, 160 Minn. 502, 200 N.W. 744(1924).

See In re Warner’s Trust, 263 Minn. 449, 117 N.W2d 224 (1962).

M.S. Section 501C.1113; M.S. Section 501C.1114

However, any improvements which are made on real estate by a life tenant become a part of such real property, and will effectively benefit the holders of the remainder interest, who are under no obligation to pay for such improvements in the absence of an agreement to the contrary.

Day v. Day, 180 Minn. 151, 230 N.W. 634 (1930) (evidence held to justify findings that written agreement of remaindermen to pay for prior improvements made by life tenant was mere personal promise, which did not create lien on property).

See Rendahl v. Hall, 160 Minn. 502, 200 N.W. 744(1924).

But see M.S. Section 501C.1114, Subd. 2(d).

The subsequent removal of improvements made to a property by a life tenant will require the consent of all of the holders of the remainder interest.

Day v. Day, 180 Minn. 151, 230 N.W. 634 (1930).

Minnesota Life Estate – Risk of Loss

A life tenant is under no duty to replace buildings which are accidentally destroyed by fire or other hazard, although the life tenant may insure the buildings for self-protection, and may collect and keep any amounts received from the insurance company in settlement of a loss.

Rendahl v. Hall, 160 Minn. 502, 200 N.W. 744 (1924).

But see M.S. Section 501C.1113; M.S. Section 501C.1114

Mortgaged Minnesota Property

A life tenant of mortgaged property is under an obligation to the holder of the remainder interest to pay interest on the mortgage, although not the principal.

M.S. Section 501C.1113; M.S. Section 501C.1114.

Conveyance by a Minnesota Life Tenant

Life tenants cannot by their own actions defeat the rights of the holder(s) of the remainder interest.

Therefore, in order to sell property subject to a Minnesota life estate, all of the life tenants (and their spouses), and all of the holders of the remainder interest (and their spouses), must sign any purchase agreement and conveyancing documents.

See Hoverson v. Hoverson, 216 Minn. 228, 12 N.W.2d 502 (1943) (widow who had life estate in homestead could not impair the right secured to the decedent’s children by the probate statute of descent, although she could make such disposition of her life estate as she saw fit, subject to the fee title that vested in the children).

M.S. Section 507.19 identifies that if a Minnesota life tenant purports to convey a greater estate than the person possesses, the estate received by the grantee will be only that estate which the life tenants could convey.

Barnes v. Gunter, 111 Minn. 383, 127 N.W. 398 (1910).

A deed of conveyance given by a life tenant conveys merely the life estate, even if it purports to be a conveyance of the entire estate, and the grantee of such a deed acquires no claim against the holders of the remainder interest.

Ashbaugh v. Wright, 152 Minn. 57, 188 N.W. 157 (1922);

In re Estate of Van Den Boom, 590 N.W.2d 350 (Minn. Ct. App. 1999) (even if the decedent’s widow were to convey the homestead by quitclaim deed, she could transfer only her interest).

Minnesota Life Estate – Actuarial Tables

The Internal Revenue Service (IRS) and the Minnesota Department of Human Services (DHS) both publish actuarial tables which may be used to determine the value of life estate and remainder interests at the time of significant events – such as the sale of the property subject to a life estate.

http://hcopub.dhs.state.mn.us/epm/#t=appendix_g.htm

Actuarial Value of Life Estates

The value of a life estate is determined based on the age of the life tenant(s) at the time of the event, and if the IRS mortality tables are used, the interest rates then in effect.

Life Estates – IRS Mortality Tables

Pursuant to the provisions of Internal Revenue Code Section 7520(a), the value of:

any interest for life or a term of years, or
any remainder or reversionary interest

is determined under tables prescribed by IRS by using an interest rate equal to 120% of the federal midterm rate in effect under Code Sec. 1274(d)(1) for the month in which the valuation date falls.

Valuation of Ordinary Term-of-years and Life Interests

If the interest to be valued is the right of a person:

to receive the income of certain property, or
to use certain non-income producing property,

for the life of one individual or for a term of years,

the present value of the interest is computed by multiplying:

the value of the property,

the appropriate term-of-years or life interest actuarial factor that corresponds to the applicable Code Sec. 7520 interest rate and term-of-years or life interest period.

Reg § 20.2031-7(d)(2)(iii); Reg § 25.2512-5(d)(2)(iii).

IRS Publication 1457 includes actuarial factors for an interest:

for a term of years in Table B, and
for the life of one individual in Table S.

Minnesota Life Estate – Actuarial Value of the Remainder

The value of the Minnesota remainder interest would be determined to be the total net sales price for the property, minus that part of the net sales price allocable to the life estate.

Alternatively, if the Minnesota remainder interest to be valued is to take effect after the death of one individual, the present value of the interest is computed by multiplying the value of the property by the appropriate remainder interest actuarial factor that corresponds to the applicable Code Sec. 7520 interest rate and the remainder interest period in Table S for one measuring life.

Reg § 20.2031-7(d)(2)(ii); Reg § 25.2512-5(d)(2)(ii).

However, if the Minnesota remainder interest to be valued is to take effect after a definite number of years, the present value of the Minnesota remainder interest to be valued is computed by multiplying the value of the property by the appropriate remainder interest actuarial factor that corresponds to the applicable Code Sec. 7520 interest rate and the remainder interest period in Table B for a term certain.

Reg § 20.2031-7(d)(2)(ii); Reg § 25.2512-5(d)(2)(ii).

Minnesota Life Estate – Actuarial Differences

The actuarial table produced by the IRS for any given transaction or transfer would differ considerably from the actuarial tables produced by the DHS for Minnesota Medical Assistance (“MA”) eligibility purposes.

The DHS actuarial tables seek to inflate the value of the life estate so as to discourage, and penalize, uncompensated transfers of the life estate to third parties.

The IRS actuarial tables more accurately represent historical mortality statistics and real economic conditions because it has no incentive to inflate the value of the life estate, although it has some incentive to inflate the value of the remainder interest which would be subject to potential gift tax liability.

If the life tenant(s) will not be making application for medical assistance benefits for the payment of nursing home expenses, the use of the IRS actuarial tables may be acceptable to all parties concerned.

However, if there is a chance that the life tenant(s) will be making application for medical assistance benefits for the payment of nursing home expenses, the use of the actuarial tables produced by the DHS for Minnesota Medical Assistance (“MA”) eligibility purposes may be preferable in order to avoid any claim of uncompensated transfers being made.

http://hcopub.dhs.state.mn.us/epm/#t=appendix_g.htm

Minnesota Life Estate – Division of Sale Price Between the Parties

In any event, the life tenant(s) and the holder(s) of the remainder interest will need to agree in writing upon the division of the net sale proceeds in order for the Title Company or other closer handling the transaction to know how to issue distribution checks and IRS Form 1099 information reports to each of the parties with respect to the sale transaction.

Therefore, it may be advisable for the life tenant(s) and the holder(s) of the remainder interest to enter into an agreement prior to closing dividing the net sales proceeds between the parties.

Conclusion – Minnesota Life Estate

If you need any assistance with respect to a Minnesota life estate, or a Minnesota remainder interest, contact attorney Gary C. Dahle, 763-780-8390, or gary@dahlelaw.com.

Gary C. Dahle – Attorney at Law

2704 Mounds View Blvd., Mounds View, MN 55112

Phone: 763-780-8390 Fax: 763-780-1735

gary@dahlelaw.com

——— Gary C. Dahle Attorney at Law ———