What should this person do next? What is allowed and what is not? This complex question is addressed in My San Antonio’s article, “Life estate deed by agent must preserve estate plan.” First, let’s clarify what a life estate deed is, and why it was used in this person’s estate plan.

A life estate deed is a real estate ownership arrangement, by which the owner gifts or sells to someone, in this case to the beneficiary child, a “remainder interest” in a piece of real estate property. The owner of the property holds a “life estate” in the real estate, which includes the right to live in the property, use it and even profit from it, as long as the life estate holder is alive. The remainder interest holder, the heir, can’t interfere with the life estate holder’s use of the property, while they are living.

The remainder interest holder does have an ownership interest in the property, which is granted in the life estate deed. The IRS publishes a table so that the value of the remainder interest can be calculated. Here’s why that matters:

  • If the remainder is gifted, then the IRS table determines the gift tax amount.
  • If the property is sold while the life holder is alive, the proceeds are split with the remainder holder, with the value determined from the IRS tables.
  • If the life estate holder needs to apply for Medicaid, the gift value of the remainder will cause a disqualification.

If the life estate holder decides to sell the property, permission from the remainder holder is required. The life estate holder may not have to pay taxes, but the remainder interest holder is likely to owe capital gain taxes, if the property is sold.

There is a special type of estate deed which changes the description above. Known as an enhanced life estate deed, or a “lady bird deed,” the owner is given the right to cancel the deed at any time. Since there is no value transferred to the remainder holder, there is no gift tax, no disqualification from Medicaid and the life estate holder can sell without needing to obtain permission from the remainder holder.

In the example above, the father did not sell his life estate interest, but retained it until the date of his death. The first challenge is proving ownership of the property. The original life estate deed should be proof of the ownership, but it must be combined with proof of death. The official death certificate will be needed to be presented to the title company, which will establish ownership under the original life estate deed.

The Alzheimer’s diagnosis creates another hurdle. Title companies are cautious when circumstances could be interpreted as self-dealing. They may ask if the agent had preserved the principal’s estate plan. In other words, did the father’s will give the house to the agent or to someone else? The agent may not act in a way that violates the existing estate plan. The durable power of attorney must be recorded with the county clerk for the life estate deed to be valid.

This is a situation where a qualified estate planning attorney will be able to ensure that proper measures are taken to protect the heir, as well as the estate.

Reference: My San Antonio (Feb. 11, 2019) “Life estate deed by agent must preserve estate plan”

Suggested Key Terms: Life Estate Trust, Deed, Holder, Life Interest, Interest Holder, Remainder, Heir, Agent

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