No secret here, I am not a fan of life estates. This is a division of real estate between a person who gets occupy use and collect rents (and pay property taxes and not destroy the property) called life estate holder and another group of people called the remaindermen, who get control of the property when the life estate holder dies. They are a “poor man’s trust” in a way that they attempt to control the property from the grave in many cases and benefit two different classes of people (like trusts do). But trust law is much clearer and developed.
Problems are many with this form of ownership. I will not take a dive into each one but here are a few of the issues
- Both the life estate holder and remaindermen need to sign any mortgage, deed or easement.
- The tax basis of a remainder holder’s interest when they sell is based on if they were given a remainder interest by a person who retained a life estate or if both the life estate holder and remaindermen received their interests from a third party. The difference can be monumental when considering the increase in value of property for capital gains considerations.
- A judgment can attach to the life estate holder’s interest and the remaindermen’s interest, which can result in a forced sale of an interest to a judgment creditor.
- The life estate has value and as far as the State of Iowa is concerned for Medicaid aka Title 19 purposes, it has a table that shows even an elderly life estate holder has value which must be liquidated prior to eligibility for care assistance.
- If a life estate holder is crop sharing, its gets really sticky. This one is the one I want to the dive into today. We are relying on cases over 100 years old, but they are sound in reasoning and should be applicable absent a legislative change. The court recently had a chance to articulate whether a time basis or maturity basis analysis was the correct one, but the court side stepped the issue by saying “you cannot sing a song to us that wasn’t first sung in trial” and indicated the complaining party failed to preserve the issue for argument. That seems to indicate they aren’t looking to upset the decisions of the World War I era Iowa Supreme court on the matters.
The law of real property dictates that the termination of a life estate occurs upon the death of the tenant to which the estate’s duration was measured. Rench v. Rench, 184 Iowa 1372, 169 N.W. 667, 668 (Iowa 1918). Upon the termination of a life estate, the remaindermen of the property are entitled to take possession and enjoy the rights associated with ownership. The estate of a life tenant who dies with outstanding rents derived from the property is entitled to collect on a pro rata basis.
The Iowa Supreme court has held matured crops are personal property of the life estate holder so the life estate holders probate estate controls those assets. Implicit in the Court’s reasoning was the recognition that when crops are unmatured, the law of unmatured crops would govern the pro rata distribution of unmatured crops in crop share lease. For purposes of resolving competing ownership claims held in crops and emblements, the law distinguishes between naturally growing vegetation not requiring periodic planting (fructus naturales) and those that do (fructus industrialis). In the case of fructus industrialis, such as corn and beans, the ownership interests are further divided in accordance with the maturity of the crop. The maturity of a crop is determined by whether the plant is continuing to draw nutrients from the soil. Clark v. Strohbeen, 190 Iowa 989, 181 N.W. 430, 433 (1921).
The general rule is that unmatured crops are attached to the real property to which they continue to derive nutrients from. Therefore, the crops, and any rent to be collected upon the harvest of such crops, passes to the individual receiving the ownership interest in the real property. That means that if a life estate holder dies with a crop share lease, the life estate holder’s interest in the crop share lease moves to the remainder holders.
