How Is a Life Estate Created in Arizona?
The legal document that creates a life estate in real property in Arizona is the life estate deed. This transfers property to another individual or entity but retains to the owner or another individual or entity, the life tenant, the rights associated with the life estate. The life tenant has certain rights that endure during their lifetime. Importantly, the life tenant has the right to occupy the property until they pass away.
The grantor who creates the life estate might be the life tenant or they might name a different individual or entity to hold the life tenancy.
The life estate is a popular entity used in estate planning, because it helps avoid probate while still making future ownership clear. An Arizona lawyer could draft a life estate deed.
There are, however, specific rules that must be followed in setting up a life estate. If someone were to try to establish a life estate without meeting Arizona’s legal requirements or neglecting potential financial consequences, it could lead to complications.
An individual must observe specific legal formalities when they draft a life estate deed in Arizona. Respecting these requirements ensures that the deed is valid and a court would enforce it. The requirements are as follows:
- The Owner of the Property: The deed must clearly state who the owner of the property is, the one who grants the life tenancy and the remainder interest, the “grantor” in legal terminology.
- The Life Tenant: The deed must also specify who the life tenant is. The life tenant has certain legal rights in connection with the property during their lifetime. The grantor could be the life tenant. Or it might be a third party.
- The Remainderman: Lastly, the remainderman, the individual who inherits the property in the end when the life tenant passes away, must also be clearly identified in the deed.
- Written Deed, Signed by Grantor, Notarized: The deed must be in writing, of course, and signed by the grantor. It must be notarized when signed by the grantor.
Failure to follow these formalities could mean that the deed cannot be enforced. This, in turn, is likely to lead to conflicts about ownership of the trust property.
The deed must explicitly state that a life estate interest is created. Arizona courts have stressed the need for clear and precise wording in the deed. In reported cases, language that was ambiguous, not clear and precise led to lawsuits regarding whether a life estate had been established as required by law.
Perhaps most importantly, the deed must state that the grantor conveys a life estate to the life tenant and conveys a remainder interest to a named remainderman.
Heirs of the grantor or creditors of the parties would be among those who have the motivation to challenge the existence of a life estate. Any ambiguity or lack of clarity in the deed can result in legal challenges, particularly if heirs of the grantor or creditors challenge its validity.
Arizona law does not require that a life estate deed be recorded in the office of the county recorder in the county where the property is located. However, recording is strongly recommended as it gives public notice and can prevent disputes in the future.
Arizona law provides that an unrecorded deed is valid between the parties to the deed themselves, the grantor, the life tenant, and the remainderman. However, it is important to recognize that it may not be enforceable against third parties who acquire an interest in the property when they did not know about the existence of the life estate.
How Does a Life Estate Work in Arizona?
A life tenant receives the legal right to occupy and use the property for their lifetime in a life estate deed. The life tenant also has responsibilities. They must maintain the property at their own expense. They must pay all local property taxes. They must purchase homeowner’s insurance for the property. They have to preserve the property so that the property which they occupy is the same property that passes to the remainderman when the life tenant passes.
A life tenant who fails to fulfill their obligations risks disputes with the remainderman. While the remainderman does not have the right to occupy the property during the life of the life tenant, they have a vested interest in it. This is their right to future ownership of the property.
In light of the remainderman’s interest, the life tenant cannot do anything that would negatively affect the value of the property. They cannot neglect the property or make major alterations without the consent of the remainderman.
A life tenant can lease their life interest in the property to a third party, but a lease would have to terminate when the life tenant passes away. Also, a life tenant cannot sell or mortgage the property without the remainderman’s consent. The remainderman’s interest is a legally protected one, even though it is not fully realized until the life tenant passes away.
In Arizona, Why Might an Individual Want a Life Estate?
A life estate deed passes ownership to property upon the death of the life tenant without going through probate. In addition to escaping the time-consuming bureaucracy of probate, it provides a tax benefit. Under federal Internal Revenue Service (IRS) regulations, when a remainderman acquires full ownership of the property after the life tenant passes, the property’s basis is adjusted to its fair market value at the time of the transfer of ownership.
This significantly reduces capital gains taxes on the gain if the remainderman later sells the property. However, this advantage can be lost if the life tenant transfers their interest before their passing, and this act by the life tenant could lead to a higher capital gains tax liability.
How Is a Life Estate Terminated in Arizona?
When the life tenant passes away, the full ownership of the property passes to the remainderman without the necessity of probate. The life estate then ends.
A life estate can also be terminated if both the life tenant and the remainderman agree to terminate the life tenancy. The life tenant would execute a quitclaim or warranty deed and then record it. This would end the life estate and give the remainderman full ownership by the remainderman.
There can be multiple remaindermen and if there is, all of them must consent to an early termination of the life estate.
What Are Types of Life Estate Property Disputes in Arizona?
In Arizona, a number of life estate property disputes can arise. The remainder interest in a life estate deed represents ownership that automatically transfers to the remainderman when the life tenant passes away. This remainder interest comes into existence from the time the deed is executed. This means that the remainderman holds a vested interest in the property, although they do not have a right to occupy the property until the life estate comes to an end.
If a life tenant does not maintain the property and causes deterioration of its condition, referred to as “permissive waste” or “affirmative waste” in legal terminology, the remainderman may have grounds for taking legal action against the life tenant.
Arizona courts have ruled that a life tenant must use reasonable measures to preserve the property’s value. If a life tenant were to remove valuable fixtures or not pay property taxes, it would cause economic loss to the remainderman.
The remainderman has the legal standing to challenge actions by the life tenant that threaten to cause significant damage and consequent loss of value to the property. There have been cases in Arizona courts in which a life tenant made unauthorized modifications to a property. Arizona courts have ruled that a remainderman has legal grounds to intervene, if changes can have a negative effect on their interest.
In addition, a remainderman’s interest can be transferred. A remainderman can sell, make a gift of or assign their interest in future ownership rights even before the life tenant passes away. The transfer would not affect the life estate, and the life tenant would continue to have a right to occupy the property.
Of course, a life estate property may be subject to any of the disputes that can arise with neighboring property owners. Disputes with local officials are also possible if a life tenant makes some use of the property that offends local zoning ordinances, for example.
What Are the Remedies for Life Estate Property Disputes in Arizona?
The remedy that might be awarded in a lawsuit involving a life estate property dispute would, of course, depend on the nature of the dispute. A remainderman might win an award of money damages from the life tenant to compensate them if the life tenant causes damage to the property.
While the property is occupied by the life tenant, a remainderman could assert rights to the property that they do not have under life estate law. A life tenant might have to go to court to obtain a restraining order against the remainderman to stop them from asserting a right they do not have.
The creditor of a life tenant or remainderman might impair the title by filing a lien on the property seeking compensation from either for an unpaid debt. The remainderman might have to pay off a lien placed on the property by the creditor of a life tenant in order to clear title. In this case, they would seek compensation from the life tenant for paying off the life tenant’s debt.
Do I Need an Arizona Lawyer for Help With Life Estate Property Disputes?
If you have an interest in property in which someone has a life estate, you want to consult an Arizona estate lawyer. You might be a grantor, a life tenant or a remainderman. Or you may be a neighboring property owner with a boundary dispute. As the creditor of a grantor, a life tenant or a remainderman, you may be looking to place a lien on life estate property.
Whatever your status or role, your lawyer will be able to help you navigate the special legalities involved in a property that is subject to a life estate. As you can see from the information above, the parties have special rights and obligations and much depends on whether the life estate deed has been recorded or not. Your lawyer can help you clearly understand your rights and protect them to the full extent of the law.
