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If sold, does value of inherited life estate stay with spouse?

Dear Mr. Premack: I have a question about the actual meaning of the law dealing with separate property of a deceased person and the surviving children. It says that the spouse inherits 1/3 “life estate” in the real property and that the children inherit the remainder of the real property, subject to the life estate. What exactly does “life estate” mean if all parties agree to sell the property? Where does the money go when it is sold? Can the spouse spend 1/3 of the proceeds, or is it held in some type of account? – TJS

Under Texas law, when a person dies without a Will or without other legally binding plan which distributes assets, then the statutes on intestacy determine how the assets are distributed. Those laws differentiate between community property and separate property, and can get very complex (and are, in fact, quite difficult to interpret because of how the statutes are worded).

For instance, community property will pass to the surviving spouse. But if there are children from a prior marriage, then the decedent’s half of the community property passes in equal portions to all the children. This is one reason that it is so important for people in a second marriage to discuss their goals and to make Wills (or other binding plans) about the distribution of their assets. Relying on the laws of intestacy can create a muddied, uncertain result.

When it comes to separate property, the statute differentiates between the “personal estate” and the “real estate”. The personal estate, which is the decedent’s separate property cash, stocks, CDs, furniture, etc., passes ⅓ to the surviving spouse and ⅔ to the children. The real estate is different. The law says that the “surviving husband or wife shall also be entitled to an estate for life, in one-third of the land of the intestate, with remainder to the child or children of the intestate…” That is the part about which you are asking.

An estate for life generally means that the surviving spouse has the right to use and to enjoy that portion of the property until that spouse dies. At the moment of death, the life estate terminates and the children from the prior marriage own the entire property. The fact that the spouse gets a life estate in “one-third of the land” makes a difference if the land also happens to be the marital homestead. In that case, the children cannot interfere with the spouse’s occupancy of the house even though she just has a life estate in ⅓ of the house because she also has homestead occupancy rights.

If the land is not homestead, but is productive – say it is a ranch or has a producing oil well – then the surviving spouse gets ⅓ of the net cash flow under her life estate. She gets that benefit for her entire life, but upon her death the benefit ceases and vests in the decedent’s children.

You ask what would happen if the land is to be sold by agreement of all the parties. How does the ⅓ life estate work? Does the surviving spouse get to keep the ⅓ of the sale proceeds or are the proceeds held for her benefit while she is alive, passing to the decedent’s children upon her demise?

The answer grows from the fact that her life estate has an actual dollar value which can be calculated using a table provided by the IRS. During any calendar year, it will have a set, specific value to her. As she gets older, according to the IRS table the value of her part decreases (since she has fewer years left to enjoy the life estate). If it is sold by agreement of all parties, then the value of her ⅓ is cashed-out, and the cash stays with her and can be used by her in any way she desires. She can spend it or give it away, and if she still has it on the date of her death then it passes to her heirs. It is not held in an account that is reserved for you.

Paul Premack is a Certified Elder Law Attorney and a Five Star Wealth Manager (Texas Monthly Magazine 2009-2013) practicing estate planning and probate law in San Antonio.

Original Publication: San Antonio Express News, December 17, 2010


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