Estate planning is about protecting you and the people you care about.
Sometimes that becomes difficult when one loved one will need additional support after your death. You may want to provide that person with a place to live without giving them complete ownership of the property.
You may also want to preserve the home for your children or other beneficiaries.
A right of occupancy trust can help balance these goals. It allows one person to live in or use real estate while preserving the property for someone else in the future.
What Is a Right of Occupancy Trust?
A right of occupancy trust allows you to name a beneficiary who may live in a residence or use another piece of real estate.
The right may continue:
- For a specific number of years
- Until the beneficiary dies
- Until the beneficiary moves away
- Until the beneficiary enters a long-term care facility
- Until another event described in the trust occurs
The trust does not necessarily give the occupant ownership of the property. Instead, it grants a limited right to use or occupy it under the trust’s instructions.
When that right ends, the property may pass to other beneficiaries, remain in trust, or be sold.
How Does a Right of Occupancy Trust Work?
A right of occupancy can be included in a last will and testament or a trust agreement.
The document directs that the real estate be held in a separate trust or subtrust. The trustee then manages the property according to the instructions you provided.
The trust should clearly identify:
- The property
- The person allowed to occupy it
- How long the occupancy right lasts
- The occupant’s rights and responsibilities
- The trustee’s responsibilities
- Who must pay the property expenses
- What happens when the occupancy right ends
If the trust is created through a will, it is generally funded through the probate process after death.
If the property is already held in a revocable living trust, it may remain in trust after death and be administered under the right of occupancy provisions. The Maryland Register of Wills explains that property held in a trust generally passes outside the probate estate.
The correct structure depends on how the property is titled and how the rest of the estate plan is designed.
Who Owns the Home During the Occupancy Period?
The trust generally holds legal title to the property. The trustee manages it for the benefit of the occupant and the future beneficiaries.
The occupant receives the right described in the trust. That right may be limited to living in the residence.
The people who will eventually receive the property are often called remainder beneficiaries.
For example, a trust might allow your spouse to live in the home for the rest of their life. After your spouse dies or moves out permanently, the home passes to your children.
The trust should make the rights of each person clear. Unclear instructions can lead to disagreements between the occupant, trustee, and remainder beneficiaries.
What Should a Right of Occupancy Trust Address?
A right of occupancy trust should provide detailed instructions. The trustee and beneficiaries should not be forced to guess what you intended.
The following questions should be considered.
Is the Personal Property Inside the Home Included?
The trust should explain whether furniture, appliances, artwork, and other household belongings remain in the home for the occupant’s use.
Questions to address include:
- Can the occupant use all furniture and appliances?
- Who owns those items?
- Can the trustee replace or dispose of damaged items?
- What happens to the personal property when the occupancy right ends?
- Are any specific items reserved for other beneficiaries?
Without clear instructions, family members may disagree over whether the contents of the home belong to the occupant or the remainder beneficiaries.
Who Pays the Property Expenses?
The trust should identify who is responsible for each expense.
Potential expenses include:
- Mortgage payments
- Property taxes
- Homeowners insurance
- Utilities
- Routine maintenance
- Major repairs
- Homeowners association fees
- Landscaping
- Assessments
- Trustee and administrative expenses
The trust may require the occupant to pay some or all of these expenses. It may instead set aside money for the trustee to use.
Another option is to divide the responsibilities. For example, the occupant might pay utilities and routine maintenance while the trust pays property taxes, insurance, and major structural repairs.
The available resources should be considered carefully. A right to occupy a home may provide little security if the beneficiary cannot afford the ongoing costs.
Must the Beneficiary Live in the Home Full-Time?
The trust should explain whether the property must serve as the beneficiary’s primary residence.
If the occupant spends several months elsewhere, the trustee may need to determine whether the right continues.
The document can define what constitutes permanent relocation or abandonment. It might also allow temporary absences for travel, rehabilitation, medical treatment, or family visits.
Can Other People Live in the Home?
The trust should state whether the occupant may allow another person to move into the property.
This could include:
- A new spouse
- A romantic partner
- A friend
- A caregiver
- An adult child
- A tenant
Allowing another person to live in the home may affect maintenance costs, insurance, liability, and the rights of the remainder beneficiaries.
The trust may permit certain people to reside there while prohibiting rentals or unrelated occupants.
Can the Occupant Rent the Property?
The document should explain whether the beneficiary may rent all or part of the property.
If rentals are allowed, the trust should address:
- Who selects tenants
- Who signs the lease
- Who receives the rental income
- Who pays rental expenses
- Whether short-term rentals are permitted
- What insurance is required
- Whether the trustee must approve the arrangement
A personal right to occupy the property does not automatically include the right to rent it to someone else.
What Events End the Right of Occupancy?
The trust should clearly define when the right ends.
Possible terminating events include:
- The occupant’s death
- Permanent relocation
- Remarriage
- Admission to a long-term care facility
- Failure to pay required expenses
- Failure to maintain the property
- Unauthorized rental or occupancy
- Expiration of a stated period
The document should also explain how the trustee determines that a terminating event has occurred.
For example, a temporary rehabilitation stay should not necessarily be treated the same as a permanent move to a nursing facility.
What Happens When the Occupancy Right Ends?
The trust instrument should direct what happens to the property after the beneficiary’s right ends.
Possible instructions include:
- Distributing the property to named beneficiaries
- Keeping it in trust for another occupant
- Allowing another beneficiary to purchase it
- Selling the property and distributing the proceeds
- Holding the sale proceeds in another trust
- Using the property for another family purpose
The trustee may be directed to sell the property unless doing so would conflict with another legal right or trust provision.
If several beneficiaries will receive the property, the trust should explain whether they receive it jointly or whether it should be sold.
Why Consider a Right of Occupancy Trust?
A right of occupancy trust may be useful in several family situations.
Providing for a Spouse Without Disinheriting Children
Suppose you own a residence in your sole name and want your surviving spouse to have a place to live.
You may also want your children from a previous relationship to inherit the property eventually.
Leaving the home outright to your spouse would allow the spouse to sell it, give it away, or leave it to someone else. Leaving it directly to your children could leave your spouse without a home.
A right of occupancy trust can allow your spouse to remain in the residence while preserving it for your children.
Keeping Family Property in the Family
Some property has been owned by the same family for generations.
You may want your surviving spouse to use the property during their lifetime. However, you may also have a strong desire for your children or other relatives to become the eventual owners.
A right of occupancy trust can provide the spouse with use of the property without changing the ultimate inheritance.
Providing Housing for a Dependent Loved One
You may have a child, sibling, parent, or another loved one who depends on you for housing.
A right of occupancy trust can provide that person with a place to live after your death. At the same time, it can preserve the property for other loved ones in the future.
If the occupant has a disability or receives means-tested government benefits, the trust should be coordinated with special needs planning. The value of the occupancy right and the way expenses are paid may affect benefit eligibility.
What Are the Potential Benefits?
A properly drafted right of occupancy trust may:
- Provide stable housing for a loved one
- Preserve the home for future beneficiaries
- Prevent an immediate forced sale
- Define responsibility for expenses and repairs
- Reduce uncertainty among family members
- Protect a family property from an outright transfer
- Allow one asset to benefit different people over time
The trust can be customized to address the particular property and family.
What Problems Can Arise?
A right of occupancy trust can also create practical challenges.
Common problems include:
- Insufficient money to maintain the property
- Disagreements over repairs
- Failure to pay taxes or insurance
- Damage caused by the occupant or guests
- Conflict between the occupant and remainder beneficiaries
- Uncertainty about whether the occupant has moved permanently
- A trustee who lacks the time or experience to manage real estate
- Property tax, income tax, or insurance complications
The trust should anticipate these issues instead of leaving them for the family to resolve later.
How Much Money Should Be Set Aside?
The amount depends on the property, the likely length of occupancy, and which expenses the trust must pay.
The plan should consider:
- Current property taxes
- Insurance premiums
- Expected maintenance
- Major systems that may need replacement
- Mortgage payments
- Trustee fees
- Inflation
- The occupant’s financial resources
- The likely length of the occupancy period
A financial advisor can help estimate how much money may be needed.
Life insurance may also provide funds for property expenses when the estate does not contain enough cash. The policy and beneficiary designation must be coordinated with the trust.
What Tax Issues Should Be Considered?
A tax advisor should review the proposed arrangement.
Relevant questions may include:
- Who may claim deductions connected to the property?
- How will trust income and expenses be reported?
- Will transferring or distributing the property create tax consequences?
- Will the property continue to qualify for a homestead or other property tax benefit?
- Could the property’s assessed value change?
- How will the property’s tax basis be determined?
- Will Maryland inheritance tax apply to the future beneficiary?
Maryland distinguishes between probate and nonprobate property, but both may have inheritance tax reporting requirements. The Maryland Register of Wills explains how inheritance tax may apply to probate and nonprobate transfers.
Tax results depend on how the trust is drafted, the identity of the beneficiaries, and the applicable law when the transfer occurs.
Who Should Be Part of the Planning Team?
A right of occupancy trust affects legal ownership, finances, taxes, insurance, and property management. Several professionals may need to coordinate the plan.
Estate Planning Attorney
An estate planning attorney can draft the trust and explain the rights of the occupant, trustee, and remainder beneficiaries.
The attorney can also coordinate the trust with the deed, will, powers of attorney, and other estate planning documents.
Financial Advisor
A financial advisor can evaluate your current assets and estimate how much money may be needed to maintain the property.
This is particularly important if the trust will pay most of the ongoing expenses.
Insurance Professional
An insurance professional can confirm that the property remains properly insured as ownership and occupancy change.
The insurer should understand that the home will be held in trust and occupied by a beneficiary who may not be the trustee.
An insurance professional can also discuss life insurance if additional money will be needed to maintain the residence.
Tax Advisor
A tax advisor can review the income, estate, inheritance, and property tax consequences.
Tax advice is especially important when the trust will hold the property for many years or the occupant and remainder beneficiaries have different tax interests.
Is a Right of Occupancy Trust Right for Your Family?
A right of occupancy trust may be appropriate when you want to provide someone with housing but do not want to give that person complete ownership of the property.
The arrangement works best when the trust clearly addresses:
- How long the person may remain
- Who pays each expense
- Who manages repairs
- Whether other people may live there
- What conduct can end the right
- What happens to the property afterward
At McDonald Law Firm, we can help you evaluate how your property should be handled and how you want to provide for your loved ones.
Once you decide how to proceed, we can document your wishes in a legally enforceable way and coordinate the trust with the rest of your estate plan.
To learn more about right of occupancy trusts or other customized estate planning options, contact us:
- Howard County: 443-741-1088
- Montgomery County: 301-941-7809
- District of Columbia: 202-640-2133
DISCLAIMER: THE INFORMATION POSTED ON THIS BLOG IS INTENDED FOR EDUCATIONAL PURPOSES ONLY AND IS NOT INTENDED TO CONVEY LEGAL, INSURANCE, OR TAX ADVICE.
