Family dynamics can change drastically when one member passes away. In particular, if a surviving spouse remarries, the question of what happens to the family home can make dynamics among the children and the new spouse even more complicated.

Setting up a right of occupancy trust within your client’s revocable living trust can clarify who owns the property, who is allowed to live there, how long they can live there, and who will eventually inherit the property. Read on to learn how to provide this service for your client.

What Is a Right of Occupancy?

A right of occupancy allows your client to designate a beneficiary to live at a property. It can also provide money for the expenses to maintain that property. This arrangement can last for a designated period or until the beneficiary dies or leaves the home. A right of occupancy is similar to a life estate, but the beneficiary cannot sell or transfer their interest in the property like a life estate beneficiary can. 

Here are two common scenarios in which a right of occupancy would be used:

Scenario 1

Betty is a seventy-year-old widow and has been caring for her sixty-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. She adds a right of occupancy trust to her estate plan, stating that Fred will have the right to live in her home after she passes away. The trust will also include $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. At that point, Betty’s children will inherit the home.

Scenario 2

Joan’s husband dies after a forty-year marriage that produced four children. Two years later, Joan marries Trevor, who is twenty years younger than she is. Joan wants her children to inherit her family home, but she also wants Trevor to be able to live there after she dies. She grants him a right of occupancy that will last for two years after her death and includes $30,000 to cover home maintenance. This will give him sufficient time to find a place of his own. At the end of the two years, Joan’s children will receive the home and the unused portion of the maintenance funds. 

Things to Consider

When considering a right of occupancy for your client, remember that 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. 

Further, when considering a right of occupancy, the client must determine whether the trustee or the beneficiary will pay the utilities. The client can also select who is responsible for paying the mortgage, property tax, home insurance, and maintenance costs.

Other considerations are more personal, as the death of the client may create a different dynamic in the family. A right of occupancy can reduce conflict among the trustee, beneficiary, and the property’s ultimate heirs (also known as remainder beneficiaries) by clearly stating the client’s wishes for the property. However, the right of occupancy may not eliminate all conflict: for example, children may feel angry believing that they could sell the home for a high price if it were not for the beneficiary being allowed to live there under a right of occupancy.

Right of Occupancy vs. Life Estate

The major difference between a right of occupancy and a life estate is that the beneficiary of a life estate can sell or transfer their right. With a right of occupancy, the ownership interest remains within the trust. The beneficiary has the right to stay in the home for a predetermined amount of time or until they move or pass away.

A right of occupancy trust does present some drawbacks. Owning real estate comes with certain tax benefits. Some states have homestead provisions that limit how much a home’s property tax can increase each year. Those benefits may not be available when the property is held in a right of occupancy trust. 

How to Use the New Right of Occupancy Drafting Feature in Wealth Docx^®

WealthCounsel’s estate planning software, Wealth Docx, allows you to add a right of occupancy to a standalone will or revocable living trust and provides options for when distributions will be made, including

• when the client dies, even with a surviving spouse (usually relating to separate property); 
• when the client dies, but only if the spouse has already passed away; or
• upon the death of the surviving spouse (for a revocable living trust only).

Wealth Docx also enables you to determine who will receive the distributions, whether it is a named individual, a charity, or a class receiving a set amount. To learn more, contact a Practice Development Consultant today to schedule a demo.