Michael has a problem. He is a 70-year-old widow, and his adult daughter, Marie, is disabled and unable to support herself. He has two other adult children. How can he ensure Marie is cared for while being fair to his other two children? Marie has lived with him and his late wife for her entire life. Their home has accommodations that make it manageable for her. Michael knows Marie is a target for people who want to take advantage of her, so he needs an estate plan that provides her with the support she needs and protects her from creditors and untrustworthy people.
A right of occupancy trust may be the best estate planning tool for this situation as it relates to property use and ownership. Setting up a right of occupancy trust clarifies who owns the home, who may live there, how long they can live there, and who will eventually inherit it.
What is a right to occupancy trust?
A right of occupancy trust allows you to designate a beneficiary to live in your home or another piece of real estate for a limited period, such as until death or another event occurs. It also allows you to provide money for the expenses to maintain the property.
To establish a right of occupancy trust, you will need to place the real property into a separate sub-trust overseen by your trustee by adding a provision in either your last will and testament or trust agreement.
The agreement includes:
- The rights and responsibilities of the beneficiary
- The trustee’s responsibilities for overseeing the trust
- Instructions about what happens to the property once the beneficiary dies
After the designated time period elapses, you may choose to give the property to the beneficiary, give it to another beneficiary, have the trustee sell the property (unless doing so would adversely affect homestead or other rights), or hold the money from the sale in trust for another beneficiary.
Each option may have legal and tax consequences, so it is a good idea to get legal advice before choosing one.
Questions to consider when establishing a right of occupancy trust
While a right of occupancy trust seems straightforward, there are several questions to consider and discuss with your estate attorney, including:
- What property will be included in the trust?
- Will the personal items, i.e., furniture, electronics, appliances, etc., also be included?
- Do you plan to include money earmarked for administrative costs, state and local taxes or assessments, property insurance, utilities, and mortgage payments?
- If you do not plan to include money for these extra expenses, does the beneficiary have the means to pay them?
- If your property is a family home, will the beneficiaries be required to live in the home full-time?
- Is someone else permitted to live in the home with the beneficiary?
- What events will terminate the beneficiary’s right to live in the residence?
When should you consider a right to occupancy trust?
One common reason to consider a right to occupancy trust is a situation like Michael’s. Marie is disabled, and Michael fears she may be homeless once he passes.
To ensure she has a home that she is comfortable living in, he adds a right to occupancy trust to his estate plan.
The trust ensures that Marie can live in the home until she dies, and it is set up to pay all her expenses while she lives there.
Once she dies, Michael wants the proceeds from selling the home to be distributed to his other two children and their children.
Another potential scenario for which a right of occupancy trust might be an excellent solution is a second marriage. Suppose you meet and marry a second spouse later in life.
You and your spouse live in the home you have sole ownership of. You want your spouse to live in your home for their lifetime, but upon their death, you want the homeownership to pass to your children, not to your spouse’s family.
A right to occupancy trust can ensure your wishes are carried out.
Things to Consider
There are many points to consider when establishing a right to occupancy trust. Consider meeting with your financial advisor, insurance agent, tax advisor, and estate attorney to get their input.
If you intend for your trust to provide money to pay for the upkeep and expenses of the property, meet with your financial advisor to evaluate your current financial holdings and discuss the steps you will need to take to ensure the trust has the resources needed to support this goal.
Meet with your insurance agent to discuss how home insurance will be maintained as it passes from your ownership to the right of occupancy trust’s ownership to an ultimate recipient.
Your insurance agent can advise you on keeping the home insured, especially if you do not have the financial resources or cash needed to maintain the home.
A tax advisor can help answer your questions about how a right-to-occupancy trust affects you and your beneficiary’s taxes. Some of these questions might include:
- Will your beneficiary be permitted to take income tax deductions concerning the property?
- Are there any applicable property tax exemptions that may lower the tax bill?
- At any point during the funding or trust administration, will the property tax be uncapped?
Estate Planning Attorney
Your estate attorney can review your information and advise whether a right of occupancy trust is the best estate planning tool to meet your goals. Another potential option is a life estate.
If you have decided to go with a right to occupancy trust, we can document your plans in a legally enforceable document that gives you peace of mind that your wishes will be carried out and your loved ones will be cared for.