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A Peril of Life Estates, and Three Solutions

By Harry S. Margolis

life-estates-deed-remainder-interest-Wellesley-MA-02481

We were recently contacted by a new client who had apparently forgotten that about 10 years earlier, she executed a life estate deed transferring the remainder interest in her house to two of her daughters. Unfortunately, one of them has since passed away and she is estranged from the other.

She now wants to sell the property, but can’t without the cooperation of the estranged daughter and of the estate of the deceased daughter. They are also both entitled to a share of the sale proceeds. She contacted us to see what she could do about the situation.

The Use of Life Estates

As explained in our most popular blog post, life estates are excellent planning techniques in many circumstances. They permit parents to pass ownership in their homes to their children, but retain absolute possession of the property during their lives. By executing a life estate deed, the property avoids probate at the parents’ deaths, is protected from a MassHealth lien, and receives a step-up in tax basis. It’s also relatively easy to create through a deed to the next generation, with the parents retaining their life interest.

But Some Caveats

Anyone creating a life estate needs to understand that in doing so, they are giving away an ownership interest in their property, a so-called “remainder” interest. They cannot sell or mortgage the property without the agreement of the new owners (with an exception described below).

They also have to make a decision if there are to be more than one holder of the remainder interest, also called “remaindermen.” Do they hold their interest as joint tenants or as tenants in common? If they are joint tenants and one of them passes away, her interest passes to the other remaindermen. If they are tenants in common, which is more common, the interest of the deceased owner passes to her estate. That was the situation in the case of the woman who contacted our office. In her case, no one had probated her daughter’s estate, so it looked like she was going to have to do so in order to sell the property.

Solution 1: Power of Appointment

In our office, we make sure our clients creating life estates retain more power over the disposition of their property by giving them a testamentary power of appointment in the deed. This is a mechanism that permits them to change who ultimately receives the property by directing its disposition in their will. You can read more about powers of appointment in life estates in: Appeals Court Confirms Use of POAs in Life Estate Deeds.

This doesn’t permit the client to direct its sale or mortgage, but it does give her more bargaining power when dealing with an uncooperative remainderman. In addition, in the case of our client, if her life estate deed had included a power of appointment, she could have made sure nothing passed to her deceased daughter’s estate. This would not, however, have saved a share of the proceeds from going to the estate if she sold the property during her life.

Solution 2: Lady Bird Deed

It turned out that in our new client’s deed, she retained the “full power to sell, mortgage, convey, transfer, encumber, and grant in whole or in part without the consent or signature of the remaindermen.” This language is commonly used in states like Florida, though not in Massachusetts, and is known as a “lady bird” deed. We confirmed with the Registry of Deeds that, for real estate purposes, it works here. Our client can transfer the property into her revocable trust without the daughters’ participation.

That solves her immediate issue, but it removes the MassHealth lien protection the life estate afforded. And we’re not sure how MassHealth would have treated the deed in the first place since it’s different from the life estate deeds they usually see.

Solution 3: Nominee Realty Trust

In addition to retaining a testamentary power of appointment, in some cases, our clients have chosen to convey the remainder interest to a nominee realty trust rather than outright to their children. They are more likely to take this step when they have a large number of children and there’s more risk that one will pass away or disagree on how to handle the property.

A nominee realty trust permits one or more children to act as trustee or trustees for all the children. The trust provides that they must follow the direction of a majority of the beneficiaries. So, if there are four children and one objects to the sale or mortgage of the property, but the other three are on board, they can direct the trustee to sign the papers necessary to facilitate the sale or borrowing.

Conclusion

While the life estate is an excellent estate planning tool, like all such tools, it has its pros and cons and fits some situations and goals better than others. Another tool often used to protect homes in estate and long-term care planning is the irrevocable trust. You can learn more about them in: MassHealth planning and Real Estate.

Related Articles:

Life Estate Owners: Beware Solvency of Remaindermen – Massachusetts

What is a Life Estate and Why Would You Want One? – Massachusetts

MassHealth planning and Real Estate

Appeals Court Confirms Use of POAs in Life Estate Deeds

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