Agent

How Does a Life Estate Deed Work?

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.

The Life Estate Deed
The Life Estate Deed is an effective way to transfer a future interest in real estate

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, which is available in Florida and a few other states. 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”

Be Careful Granting Power of Attorney

Power of Attorney abuse has emerged as a serious problem for elderly people who are vulnerable to people they trust more than they should, reports the Sandusky Register in the article “Consumer beware: Understanding the powers of a Power of Attorney” The same is true for a Durable Power of Attorney for Health Care document, which should be of great concern for seniors and their family members.

Care should be taken when choosing an agent to act in your behalf

This illustrates the importance of a Power of Attorney document: the person, also known as the “principal,” is giving the authority to act on their behalf in all financial and personal affairs to another person, known as their “agent.” That means the agent is empowered to do anything and everything the person themselves would do, from making withdrawals from a bank account, to selling a home or a car or more mundane acts, such as paying bills and filing taxes.

The problem is that there is nothing to stop someone, once they have Power of Attorney, from taking advantage of the situation. No one is watching out for the person’s best interests, to make sure bank accounts aren’t drained or assets sold. The agent can abuse that financial power to the detriment of the senior and to benefit the agent themselves. It is a crime when it happens. However, this is what often occurs: seniors are so embarrassed that they gave this power to someone they thought they could trust, that they are reluctant to report the crime.

Similarly, an unchecked Health Care Power of Attorney can lead to abuse, if the wrong person is named.

The following is a real example of how this can go wrong. An adult child arranged for their trusting parent to be diagnosed as suffering from dementia by an unscrupulous psychiatrist, when the parent did not have dementia.

The adult child then had the parent admitted into a nursing home, misrepresenting the admission as a temporary stay for rehabilitation. They then kept the parent in the nursing home, using the dementia diagnosis as a reason for her to remain in the nursing home.

The parent had to hire an attorney and prove to the court that she was competent and able to live independently, to be able to return to her home.

Meet with an experienced estate planning attorney to discuss your situation and figure out who might become named as Power of Attorney and Health Care Power of attorney on your behalf. The attorney will be able to help you make sure that your estate plan, including your will, is properly prepared and discuss with you the best options for these important decisions.

Reference: Sandusky Register (Feb. 5, 2019) “Consumer beware: Understanding the powers of a Power of Attorney”

Suggested Key Terms: Power of Attorney, Health Care, Principal, Agent, Elder Abuse, Estate Planning Attorney,

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