What About Life Estates with Powers?
You mentioned life estates in one of your answers and how they relate to Medicaid. I’ve also heard about life estates with powers, which do not have all the limitations of life estates. Do you recommend them?
That’s a good point. The complication is that the rules differ from state to state.
Life estates are a form of co-ownership of real estate in which one or more people — the “life tenant” or “life tenants” — have the right to possess the property during their lives and others — the “remainderman” or “remaindermen” — take possession upon the death of the last surviving life tenant. These are typically created through deeds in which the grantor gives the property to someone else with a reservation of a life interest.
There are a lot of benefits to life estates, including avoidance of probate, protection from Medicaid estate recovery, and the remaindermen ultimately receiving the property with a step-up in basis. However, since they give an ownership interest to the remaindermen, the original owner gives up control. They can’t sell the property without the cooperation of the remaindermen. Trouble can arise if any of the remaindermen die before the grantor or get into marital or financial difficulties.
In my state of Massachusetts, to allow for adjustments in these cases, we include limited testamentary powers of appointment in the life estates we create. This allows the grantor to change the ultimate disposition of the property by exercising this power in their will. This way, parents who create life estates can make changes if any of their children have difficulties (marital, drug, financial issues) or pass away. It also gives them more control in case a child is uncooperative in some way.
Other states allow the grantor to retain much broader powers. Here’s what one Maryland firm says on its website: “The powers retained in this type of Deed include the ability to remain living in the property, sell, refinance, transfer or mortgage the property, and basically exercise absolute ownership and control over the property while living.”
Still other states permit the creation of “ladybird” or transfer on death deeds. These are, in fact, not transfers of ownership in property. Instead, the deeds simply say who will receive the property upon the death of the owner or owners, similar to a beneficiary designation on a retirement, investment or bank account.