Life estate
A life estate gives one person the right to use or possess property for that person's lifetime, while another person holds a future interest in the property. For owners of businesses, real estate and private investments, the term describes how successive interests in property can be arranged. A life estate appears as an example of successive interests in the federal special use valuation rule.
How it works
A life estate separates a present interest from a future interest in the same property. The life tenant holds the interest tied to a person's lifetime, and a remainder holder holds the interest that follows it.
For qualifying farmland, an estate may elect agricultural-use value instead of fair market value under I.R.C. Section 2032A. The election is made on the estate tax return and is irrevocable once made.
Where it shows up for owners of businesses, real estate and private investments
A life estate can appear in the ownership of real property when one interest lasts for a person's lifetime and a remainder interest passes to another holder.
The distinction matters to the federal special use valuation rule for qualifying real estate. That rule is unavailable when successive interests are created and any interest passes to a non-qualified heir. Section 2032A applies only to the land portion of a farm estate.
Points that are easy to confuse
A life estate describes an interest in property, while special use valuation describes an election for valuing qualifying farmland in an estate. A life estate example does not itself establish that farmland qualifies for the election.
A federal restriction applies when successive interests pass to a non-qualified heir. That consequence belongs to the special use valuation rule and does not apply to every life estate.
Common questions
What is the difference between a life tenant and a remainder holder?
A life tenant holds a present interest tied to a person's lifetime. A remainder holder holds a future interest that follows it.
Does a life estate qualify farmland for special use valuation?
The federal rule allows an estate to elect agricultural-use value for qualifying farmland, and special use valuation is unavailable where successive interests include an interest passing to a non-qualified heir.