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Understanding deeds and retaining life estates


Newspaper deed transfers often reflect elders deeding their real estate to their children for a dollar. They do this in order to avoid the costs, delay and hassle of probating their Will at their death.


Another reason is asset protection. They want to transfer assets away from themselves to protect them from potential catastrophic health care costs. They want to get the so- called 5-year penalty period clock ticking.

What you don’t see in the deed transfer notice, is that the elder generally retains a life estate. This is wise. I never recommend that a client transfer 100% ownership. Why not? Because if something happens to the child such as bankruptcy, lawsuit or divorce, you are completely vulnerable. What if you become estranged from one or more of the recipients and they evict you? What if your son dies, and the daughter in-law you never got along with becomes owner? Believe me, it happens.

A life estate is the retention of an interest. What you retain is the right to live in your house for the balance of your life. No one can evict you or sell the property from under you without your permission. It completely insulates you from your childrens’ problems in your ability to live there (subject to considerations below). When you deed the property away, and retain a life estate, what you are transferring to your child is a future ownership interest. Your child will own full title once you have passed away, not now. Upon your death, a death certificate will be filed at the registry of deeds and the property automatically becomes your child’s. No need for probate.

However, even though your child doesn’t have a current interest you still need the child’s cooperation if you later want to do something with the property. You are essentially partners. If you want to sell or obtain a reverse mortgage (to help pay for care in the home), you will need that child to sign a deed or mortgage. There can be huge problems if that child has become estranged or has divorced or deceased. The child with a future interest cannot oust you from your house because you retained a life estate, but they can block your later attempts to sell, mortgage or give the property to someone else.

The retention of a life estate also has tax advantages. At your death the IRS views your children as having “inherited” the property. As inherited property they obtain full ownership at the value as of the date of death. So when they turn around and sell the house shortly thereafter, there are no capital gains taxes. Compare, if you were to completely transfer the house to them. When they sell it, the IRS and the Commonwealth will hit them for capital gains taxes because they were gifted the asset rather than inheriting it.

When transferring to one or more of your children I strongly urge that the children have their own Power of Attorney and Will in the unlikely event they were to become cognitively disabled or decease prior to the elder. I inherited a case from another attorney where the elder had transferred her house to her five children. One of the five unexpectedly died without a Will, spouse or children. His ownership interest bounced back to his mother under the laws of intestacy. The mother at that point was in a nursing home. The scenario was a perfect storm which could have been avoided by junior owning it jointly with his siblings (vs. tenancy in common) or having a Will leaving his estate to a sibling, rather than his frail mother.

I have had clients say... “I want to get my estranged child off the deed because he has not been visiting or helping me in my time of need.” Unfortunately, there is little that I can do for that client. You can write them out of your will but that doesn’t matter, because the real estate won’t go through probate. Threatening to cut them out will not work when you have already deeded the property. At that point you have no bargaining power. Transferring your house and retaining a life estate has many virtues, but there are also potential pitfalls.

Nothing is ever easy, is it?


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