This column first appeared in the San Antonio Express News and other Hearst Newspapers on February 11, 2019.
Dear Mr. Premack: I am the beneficiary on my father's life estate deed of his home. He passed in October 2018. I am wanting to sell the house and have not filed a warranty deed to put the house in my name. Also, the life estate deed is via POA because my father had Alzheimer's and at the time of the preparation of the life estate deed, would not have been considered able to make such a decision. Do I need to get a warranty deed in my name? What are my next steps? PR
By way of history: a life estate deed is a real estate ownership arrangement under which the owner sells or gifts to a recipient a “remainder interest” in a property. The owner then holds “life estate” the in the real estate, which includes the right to occupy, use, enjoy, and profit from the real property so long as the life estate holder remains alive. The remainder interest holder has no right to interfere with the life estate holder’s rights in the property. The property involved can be land or a residence of any value, high or low.
However, the remainder interest holder does have an ownership interest in the property, as granted in the life estate deed. That ownership interest has a definite value. The IRS publishes a table that allows taxpayers to calculate the value of the remainder interest. This is important for three reasons: 1) if the remainder is gifted – as it may be within a family – then the IRS table determines the gift tax impact, 2) if the property is sold while the life estate holder is living, the net proceeds are split with the remainder holder according to the IRS table, and 3) if the life estate holder needs 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 when it is sold, but the remainder interest holder is very likely to owe capital gain taxes if the property is sold.
There is a special type of life estate deed – often called a Lady Bird Deed or an Enhanced Life Estate Deed – which changes the above impacts. In it, the owner reserves the right to cancel the deed unilaterally. Consequently, there is no value transferred to the remainder holder. There is no gift tax. There is no disqualification from receiving Medicaid. The life estate holder can sell without permission from the remainder holder.
In your situation, your father did not try to sell his life estate interest. Rather, he retained it until the date of his death. Your first challenge is proving you own the property so you can sell it. The answer is that the original life estate deed is proof of your ownership, but it must be combined with proof of his death. Since you are selling, you can present his official death certificate to the Title Company, which will establish your ownership under the original Life Estate Deed. (If you were planning to keep the property, you would have your Elder Law Attorney prepare an Affidavit Pursuant to Death of Life Estate Holder. The Affidavit would be filed with the county clerk to act as proof of your father’s death.)
Another challenge you face due to your father’s Alzheimer’s is that the original Life Estate Deed was signed by his Agent. Title Companies are wary when the Agent may have been self-dealing, and may ask if the Agent preserved the principal’s estate plan (that is, did your father’s Will give the house to you or to others? The Agent cannot act in a way that violates the existing estate plan). Also, the Durable Power of Attorney must be recorded with the county clerk for the Life Estate Deed to be valid. Hence, you may face heighted scrutiny from the Title Company when you go to sell the property. Working with a qualified Elder Law Attorney may help to smooth the bumpy road ahead.
Paul Premack is a Certified Elder Law Attorney with offices in San Antonio and Seattle, handling Wills and Trusts, Probate, and Business Entity issues.