Exercise Caution when Considering a Life Estate Deed


A Life Estate Deed is one of the quickest and cheapest ways to transfer property to your children and still hold onto some strings of ownership. People are attracted to this strategy due to the idea of probate avoidance and the chance that they might become eligible for Medicaid benefits in the future. But is a Life Estate Deed really a form of estate planning? Or is it something less?

The possibility that signing a Life Estate Deed may give you less than you bargain for is demonstrated by the owner of a 36 acre golf course in coastal Newburyport, Massachusetts. The owner deeded the property to her daughter and retained a Life Estate. But after the deed was recorded in the Southern Essex County Registry of Deeds, the owner changed her mind and decided she wanted full ownership of the property returned to her control. The daughter said, “nuh-uh.”

There are many reasons you might change your mind after transferring your house or other property to your child or another family member.

Reason #1: If the property is your house and it is sold during your lifetime, you may have income tax problems. Your principal residence exclusion on capital gains tax will be limited or lost.

Reason #2: The house value counts against you if you need Medicaid to pay for nursing home care within 5 years after the transfer, and there may be more Medicaid problems depending on which state you live in.

Reason#3: Your child or family member could go into bankruptcy. You’ll have to negotiate with your child’s bankruptcy trustee and maybe pay them to get your house back.

Reason #4: Your child or family member could get divorced. The ex-spouse will claim the asset as marital property.

Reason #5: Your child or family member could cause a serious accident. If there isn’t enough insurance, the personal injury attorney will be able to go after the property.

Reason #6: Your child or family member might predecease you. You will need probate to straighten that out.

Reason #7: You may decide you don't want to live in the house anymore, but your child won't give the house back to you so that you can sell it. Like with the golf course in Newburyport, children don’t always do what they are told.

In this case, to try to regain full control of her golf course property, the Mom filed a complaint against her daughter in Massachusetts Land Court, “seeking to nullify the deed on grounds of lack of capacity and undue influence.” Just before she signed the Life Estate Deed, Mom had been hospitalized with symptoms that included hallucinations!

The daughter filed a counterclaim in the Land Court case, and also demanded a trial in Superior Court. She got testimony at the Superior Court trial from Mom’s own attorney. The attorney had spoken with Mom “three times and met with her at least twice after her hospitalization, before she signed the deed.”

Mom lost the case and then tried to get the Massachusetts Appeals Court to see how she really wasn’t competent to sign the Life Estate Deed. But the three Appeals Court judges issued a summary disposition against her. They decided that the Superior Court “judge was not required to credit Mom's testimony over that of her attorney, her daughter, and her grandson, each of whom observed her on the date she executed the deed.” It was too late to change her mind.

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The Appeals Court judges were most impressed with what Mom’s attorney said about his client: “he did not observe any mental weakness that caused him to question her capacity.”

The testimony from Mom’s own attorney shows how signing a Life Estate Deed may not always be a good form of estate planning. It may be something much less.

You can read the case here.

Ethel M. Vitale, individually and as trustee of the Ethel M. Vitale Trust v. and Donna A. Koen and DDJH, LLC., No. 14-P-1775., Appeals Court of Massachusetts (January 12, 2016) Docket: http://www.ma-appellatecourts.org/search_number.php?dno=2014-P-1775&get=Search

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