Buy a home now, move in after the seller dies
Hugh Hefner is living out his days in the Playboy Mansion, even though the legendary property no longer belongs to him.
The 29-room Holmby Hills home went on the market with a unique stipulation: that its 90-year-old resident be allowed to stay until he passes away. Last summer, investor Daren Metropoulos agreed, buying the mansion for $100 million and promising to lease it to Hefner for $1 million a year.
Till-death-do-us-part property deals are a regular part of estate planning in Southern California, home to scads of older wealthy residents in high-value homes.
Socialite Zsa Zsa Gabor resided in her Bel-Air estate until her death Dec. 18 at age 99, despite selling the 28-room property for $11 million three years prior. Gabor bought the French Regency-style mansion — which counts Howard Hughes and Elvis Presley as former tenants — in 1973.
“There’s this whole subculture, this unseen gray market of properties in Southern California, where really sophisticated sellers are selling these hugely appreciated assets or gifting them to Cedars Sinai or USC while staying in the house,” said Dana Taschner, who runs a boutique law firm in Los Angeles.
Guaranteeing lifelong residency can happen in several ways.
Homeowners who don’t want to sell can set up a life estate that passes the property to their heirs — family or otherwise — while reserving the right to remain until death. The future beneficiaries, known as remaindermen, hold legal interest in the home and don’t have to worry about tricky probate issues.
Charitable remainder annuity trusts are another option. Rather than sell their home and risk a capital gains hit, some homeowners opt to gift it. As part of the deal, some ask to retain residency, with annuity payments for life from the charity
The income tax deduction can be hefty. In Southern California, some institutions are so flooded with offers of gifted homes that they’re selective about which properties they’ll accept, Taschner said.
“If you’re selling a company or a big chunk of stock, giving your home to an institution may be the singular biggest write-off you’ll have for that particular year,” he said.
Occasionally, though, older homeowners with cash-flow concerns will sell a property and demand down and annuity payments to support their continued occupancy.
It’s similar to a French concept known as viager — “for life.” In viager deals, property buyers make a down payment and then send regular sums to the home seller for the rest of the latter’s life.
Essentially, it’s a morbid form of real estate speculation. Buyers gamble that the tenant dies before the the full value of the property is paid out. Switzerland considers viager so risky that it banned the practice.
The difference in the U.S. is that such deals generally aren’t quite as risky. The buyer is usually on the hook for the full value of the house, regardless of when the seller passes away. The total can be paid up front or over time.
But the arrangements can still be tricky. Buyers often want a discounted price in exchange for waiting an indeterminate amount of time to inhabit or control the property.
Older homeowners can also engineer a range of hybrid solutions to retain residency, said Kira S. Masteller, an estate planning attorney and shareholder at the Lewitt Hackman law firm in Encino. They can negotiate with buyers or heirs about property tax payments and maintenance responsibilities, the chain of command for improvements or rental income and more.
Such decisions are informed by a host of factors, such as tenant age and property reputation.
Other times, buyers end up paying to move the tenant out of the house into long-term assisted medical care to keep them from dying on the property.
“It puts a bit of a cloud over the value of the house if you somebody passed away in the master bedroom,” Taschner said.
Masteller said less than 5% of her well-heeled clients resort to till-death-do-us-part property deals.
“It’s for limited situations,” she said. “The average person would not do this type of agreement.”
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