Exercise Caution When Considering a Life Estate Deed


A life estate deed is one of the quickest and cheapest ways to transfer real property to another person while still holding onto some of the benefits of ownership. For example, through this legal document, Dad can arrange for the direct transfer of his home upon his death to his daughter (known as the remainderman). Dad retains a life estate under the terms of the deed, meaning he can continue using/living in the home until he dies.

People typically consider a life estate deed because they like the idea of avoiding probate and/or they believe there is a chance that they might need to apply for Medicaid-covered long-term care in the future. But is a life estate deed really a form of estate planning? Or is it something less?

The Risks of a Life Estate Deed

Be careful when considering a life estate. Transferring your house or other property to your child or another family member has risks. “Undoing” a life estate deed isn’t always easy and comes with its own consequences.

Risk 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 might be limited or lost.

Risk 2: If you apply for Medicaid to pay for nursing home care within 5 years of signing the life estate deed, this property transfer will count as a gift and trigger a penalty period. There may be additional Medicaid problems that arise from this transfer, depending on which state you live in.

Risk 3: The child or family member you name as remainderman could go into bankruptcy. You’ll have to negotiate with your child’s bankruptcy trustee and maybe pay them to get your house back.

Risk 4: Your remainderman could get divorced and the ex-spouse will claim the asset as marital property.

Risk 5: Your remainderman could cause a serious accident. If there isn’t enough insurance, the personal injury attorney will be able to go after the property.

Risk 6: Your remainderman might predecease you. The property would have to go through probate and their heir(s) will become the new owner(s).

Risk 7: You may decide you don’t want to live in the house anymore, but you can’t sell or mortgage the property unless your remainderman agrees to transfer it back to you.

An Example of a Life Estate Deed Gone Wrong

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. Unfortunately, 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. Normally, if a remainderman agrees, then the original owner can recover the property. In this case, the daughter refused.

In an attempt 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 demanded a trial in Superior Court. She got testimony at the Superior Court trial from her 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.”

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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.

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. Had Mom considered the full implications of using this legal tool, perhaps she would have opted for a different estate planning strategy.

You can read the full 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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