Family dynamics can change drastically when a parent passes away. If a surviving spouse remarries, the question of what happens to the family home can make the dynamic among the children and the new spouse complicated. As a part of the estate plan, setting up a trust that includes the right of occupancy can clarify who owns the property, who may live there, how long they may live there, and who will inherit the property.
What is a Right of Occupancy?
Granting a right of occupancy allows you to designate a beneficiary to live at your homestead or other property. A right of occupancy may also provide money for the expenses to maintain that real property. The arrangement can last for a designated period of time or until the beneficiary dies or leaves the property. A right of occupancy is similar to a life estate, but the beneficiary cannot sell or transfer their interest in the property as a life estate holder can.
Below are two scenarios where a right of occupancy provision in your trust could be used:
Scenario 1 – Betty is a 70-year-old widow and has been caring for her 60-year-old brother, Fred, throughout his adult life. Fred is mentally disabled and cannot work or live on his own. Betty is afraid that when she dies, Fred will become homeless. Betty adds a right of occupancy provision to her trust, stating that Fred may live in her home after she passes away. The provision also includes $40,000 to cover maintenance costs. Fred will live in the home for the rest of his life or until he moves into an assisted-living facility. Betty’s children will then inherit the home.
Scenario 2 – Joan’s husband dies after a 40-year marriage that produced 4 children. 2 years later, Joan marries Trevor, who is 20 years younger than Joan. Joan wants her children to inherit her family home, but she also wants Trevor to live there after she dies. Joan grants Trevor the right of occupancy for 2 years after her death and includes $30,000 to cover home maintenance. This will give Trevor sufficient time to find a place of his own. At the end of the 2 years, Joan’s children will receive the home and the unused portion of the maintenance funds.
What You Should Consider With A Right of Occupancy
When considering a right of occupancy provision for your trust, remember the beneficiary typically must occupy the home to retain the right. In addition, the beneficiary does not have an ownership interest that can be sold or transferred. You will need to determine, with the help of your estate planning attorney, whether the trustee or the beneficiary will pay the property expenses. Clearly state who will pay the mortgage, property tax, home insurance, and other maintenance costs.
Other considerations are more personal because often a death in the family will alter the family dynamics. A right of occupancy can reduce conflict among the trustee, beneficiary, and the property’s ultimate heirs by clearly stating what will be done with the property following your passing. Understand that the right of occupancy may not eliminate all conflict. For example, children may feel angry believing they could sell the homestead or second home for a high price if it were not for the surviving stepparent or other beneficiary being allowed to live on the property under a right of occupancy.
Right of Occupancy Compared to a Life Estate
The major difference between a right of occupancy and a life estate is that the beneficiary of a life estate, at least in theory, can sell or transfer their interest; however, it is rare when this happens. I have never witnessed a situation where a life estate holder finds a third party willing to buy their life estate interest because the buyer’s right to possess and enjoy the property would be tied to the longevity of another person. With a right of occupancy, the property ownership remains in trust after the death of the trustmaker and although the beneficiary may stay in the home for a predetermined amount of time or until they move or pass away, they have no ownership interest to sell or transfer.
A Disadvantage with a Right of Occupancy
Owning a Florida homestead comes with tax benefits, including a reduction in the amount of annual property taxes and a limit to how much the property’s tax assessed value can increase each year. Those homestead benefits may not be available when the property is held in a trust under a right of occupancy, which can present a possible downside for homestead property depending on how long the decedent owned the homestead before their death. As an example, if the decedent owned their homestead in Florida for 20 years, the real estate taxes would have remained relatively low over those years compared to the same or similar home without the homestead tax assessment limitation. After a person passes away, their homestead tax exemption is eliminated in the following year after death and the property’s tax assessed value is adjusted to a current tax value. For a decedent who owned their homestead for 20 years, the result would be a substantial increase in real estate taxes due to the lifting of the homestead tax exemption. For a decedent who owned their homestead for only 3 years, the resulting increase in real estate taxes would not be as jaw-dropping.
Contact the estate planning attorneys at Stross Law Firm, P.A. at 813-851-6500 to discuss your estate and incapacity planning and to see if a right of occupancy for a loved one may be appropriate to include in your estate plan.