When working with seniors, there may be special considerations associated with acquisition and disposition of real estate not commonly associated with the typical sales transaction. Such special considerations may include:
- Incapacity of an owner to execute a deed.
- Use of a power of attorney to execute a deed and/or close the sales transaction.
- Conveyance of title to or from a trust.
- Death of co-owner.
- Tax related issues associated with the disposition of real estate such as estate tax and capital gains tax.
- Medicaid recovery actions and recapture liens.
- Estate planning issues associated with the manner in which a property is conveyed.
Incapacity of Owner
When dealing with seniors, issues may arise because the owner of the property is incapable of selling and conveying title to real estate due to a physical disability or mental impairment such as a stroke, the onset of dementia, etc. As a general rule, a person deemed incompetent lacks the capacity to sell and convey title to real estate. Notwithstanding this general rule, the simple diagnosis of a medical condition is not determinative. Whether a person is incompetent or otherwise lacking the capacity to sell and convey title is a fact intensive inquiry and focuses on whether or not the owner has “sufficient mental capacity to understand in a reasonable manner the nature and effect of his or her acts or to know the extent of his or her property and to know his relatives and their claims on his bounty.”
Often, a settlement agent will assume that a person is competent absent an adjudication finding the person incompetent – that is, absent the appointment of a guardian or conservator for the person and/or his or her property. The risk associated with such practice is that the conveyance could be set aside if the person is deemed to have been incompetent. Ultimately, this issue must be resolved to the satisfaction of the buyer and/or the buyer’s title insurance underwriter as they bear this risk. In the event that a person is incompetent, the only way to convey their interest in the property is to secure the appointment of a conservator. Although it is more common to see this issue among seniors, this issue can arise in a variety of situations unrelated to one’s age. With advance planning, this type of issue can be addressed by using a durable power of attorney (executed prior to one’s incompetency) or by acquiring title in the name of a trust or family partnership providing for a successor beyond the original person creating the trust or partnership.
Use of Powers of Attorney
A power of attorney is simply an instrument that grants to a third party the power to act on behalf of the principal. A power of attorney may be general or may be limited. That is, the scope of the agent’s authority to act on behalf of the principal may include broad general powers or may be limited to a specific act or transaction or may be limited in the sense that the power to act is only effective upon the disability or incapacity of the principal. In addition, a power of attorney may be durable. Generally, the power of the designated agent to act on behalf of the principal terminates upon the death or disability of the principal granting the power of attorney. The exception is that the authority of a principal acting under a durable power of attorney does not terminate due the disability or incapacity of the principal. Notwithstanding this exception, no power of attorney permits an agent to act after the death of the principal.
When you are involved in a transaction where a power of attorney is being used to convey title, it is important that you obtain the original of the power of attorney so that it may be reviewed in a timely manner by the title insurance underwriter as well as the mortgage underwriter. To convey title using a power of attorney, the power of attorney must be duly notarized and must otherwise be in recordable form. The best practice for drafting a power of attorney is to specifically include the power to sell, transfer and convey real property (as opposed to relying on a general power to act on behalf of the principal) as well as the legal description to the property (if known). There are additional drafting requirements for durable powers of attorney under the Missouri Durable Power of Attorney Act, Sec. 404.700 R.S.Mo. (2009), et seq.
Transfers to and from a Trust
As discussed above, transfers to and from a trust can avoid issues associated with the death or incapacity of an owner, provided that there is a successor trustee named in the instrument or provided that a successor trustee is duly appointed. Transfer to and from a trustee may be made in the name of the trustee or in the name of the trust. Sec. 456.021 R.S.Mo. (2009) Under prior case law, a transfer made in the name of the trust was invalid. Similar to the use of a power of attorney, transactions involving the conveyance to or from a trust must be reviewed by the buyer’s title insurance underwriter and/or mortgage underwriter. Accordingly, it is important to send to the underwriter a copy of the trust instrument at the earliest possible point in the transaction to avoid delays in closing.
It is likely that we will see the rise in “dynasty trusts.” In 2001, the Missouri General Assembly repealed Missouri’s Rule against Perpetuity. Sec. 456.235 R.S.Mo. (2009) As a result, the restrictions on the length or term of the trust (life in being plus 75 years) no longer apply. Without such a restriction, it is likely that we will see trusts that seek to keep homesteads intact or include restrictions on the use or transfer of real estate in the trust instruments.
Death of Co-Owner
In the event of the death of a co-owner, it important to inquire as to the marital status of the deceased co-owner as well as to how the property was titled. With the rise in cohabitation and second marriages among seniors, it cannot be presumed that the property transfers to the cohabitating partner or new spouse upon the death of the co-owner. It will vary based on how the property was acquired and titled. The general rules are as follows:
- Property Titled as Tenancy by the Entirety: A property acquired by husband and wife is presumed to create a tenancy by the entirety. Upon the death of the spouse, title passes to and vests in the surviving spouse.
- Property Titled as Joint Tenancy with Rights of Survivorship: Upon the death of one owner, title passes to and vests in the surviving owner or owners.
- Property Titled as Tenants in Common: Upon the death of the owner, his or her share transfers to his or heirs, not to the surviving owners, by will or by intestate succession.
In the case of the death of a spouse with a property titled as a tenancy by the entirety or the death of joint tenant or co-owner with a property titled as joint tenants with rights of survivorship, there are two primary methods of conveying title after the death of the spouse or co-owner. The deed conveying the property to a subsequent purchaser could include recitals setting forth the property was originally held jointly, one of the co-owners is deceased, and the survivor is now the sole owner of the property. The other alternative more commonly used is to record a separate document in the form of an affidavit of death (also known as an affidavit of joint tenancy or affidavit of tenancy by the entirety).
Seniors, like other home sellers, often are faced with a substantial capital gains tax associated with the sale of their home. In 1997, the U.S. Congress passed the Taxpayer Relief Act of 1997 (Public Law No. 105-34). The law replaced earlier home sale rollover rules and the $125,000 exclusion of home sellers over the age of 55. The new law includes an exemption from taxation of profits on the sale of one’s personal residence up to $250,000 for singles and $500,000 for married couples filing jointly.
To qualify for this exemption, the person must have owned and used the home as their principal residence for at least two of the last five years before the sale. Under the Internal Revenue Service Restructuring and Reform Act of 1998 (Public Law 105-206), individuals not meeting the two year requirement may be entitled to a portion of the tax benefits because they may exclude from income an amount equal to that fraction of the exclusion that is proportional to the use of the home as a principal residence over the two-year term. In addition, the capital gains exclusion may be used by grantor trusts (ie. revocable trusts or living trusts). See, IRS Letter Ruling 199912026 (March 26, 1999).
Often, seniors and their agents will ask whether or not they can avoid the capital gains tax by doing a tax-deferred exchange. Unfortunately, tax deferred exchanges are only available for business or income producing property, not personal residences.
Seniors and their heirs often face Medicaid recovery claims and liens on personal residences where one spouse has received Medicaid benefits or assistance.
Medicaid Recovery Actions: Under federal law, following the death of the Medicaid recipient a state must attempt to recover from his or her estate whatever benefits it paid for the recipient's care. However, no recovery can take place until the death of the recipient's spouse. While states must attempt to recover funds from the Medicaid recipient's probate estate, meaning property that is held in the beneficiary's name only, they have the option of seeking recovery against property in which the recipient had an interest but which passes outside of probate. This includes jointly held assets, assets in a living trust, or life estates. Given the rules for Medicaid eligibility, the only probate property of substantial value that a Medicaid recipient is likely to own at death is his or her home. Although it is beyond the scope of this article, the Missouri Court of Appeals for the Western District denied the State of Missouri the right to recover the proceeds from the sale of a house in decedent’s estate for reimbursement of Medicaid payments made decedent’s wife where the wife predeceased her husband. See, In the Estate of Orville Bruce, No. 68051 (Mo. App. W.D., May 13, 2008). This case is likely to be short lived as it centered solely on the definition of “estate” under Missouri law.
Medicaid Recovery Liens: In addition to the right to recover from the estate of the Medicaid beneficiary, state Medicaid agencies must place a TEFRA lien on real estate owned by a Medicaid beneficiary during her life unless a spouse or certain dependent relatives are living in the property. If the property is sold while the Medicaid beneficiary is living, the Medicaid recipient may cease to be eligible for Medicaid due to the proceeds from the sale and may be required to satisfy the TEFERA lien. Whether or not a lien is placed on the house, the lien's purpose is only for the recovery of Medicaid expenses if the house is sold during the Medicaid recipient's life. The lien should be extinguished and removed upon the Medicaid recipient’s death.
Estate Planning Considerations
Often, how seniors take title to a property may be based on estate planning considerations. Possible ways in which title to real estate might be held or disposed include:
- Jointly Held Property
- Beneficiary Deed
- Deeds with Reserved Life Estates
- Revocable Trusts
- Irrevocable Trusts
- Intentionally Defective Irrevocable Trusts:
- Qualified Personal Residence Trusts:
The list above represents a progression of real estate related estate planning tools in terms of complexity and cost. The decision as to what vehicle is best suited to the needs of the customer is best left to legal and tax professionals who can carefully tailor the vehicle to the intentions of the customer. However, there is an important role for real estate professional to play before closing. Often, customers will defer these decisions until after closing. In some cases such as the joint titling of assets, the manner of titling cannot be efficiently undone without the consent of the co-owner. In other cases, the post-closing restructuring of the transaction and how the property is titled can have unintended consequences, including increased costs.
In assisting customers with these items, it is important that the real estate professional involved in the transaction encourage the customer to make additional inquiries. Here are two questions that should always be asked by the customer in this situation:
- Will the post-closing transfer of the property trigger (or potentially trigger) the due on sale clause contained in the deed of trust?
- Will the post-closing transfer of the property terminate or otherwise cut-off title insurance coverage? Followed by: Is a title policy endorsement available to cover the change?
Like many issues described in this article, estate planning is beyond the scope of expertise of real estate professionals. It isn’t the role of the real estate professional to provide advice or guidance or make recommendations regarding these issues. However, it is important that the real estate professional involved in the transaction be able to identify the issue, anticipate issues that may impede or delay closing, and to refer the customer to the appropriate legal or tax professional specializing in real estate, tax or elder care law.
Disclaimer: The author is a licensed attorney. However, the opinions and statements contained herein are for informational and discussion purposes only and shall not constitute the provision of legal advice. Nothing contained herein shall establish an attorney-client relationship. Readers are cautioned to seek legal counsel in their state before using or relying upon any of the information contained herein.
All Rights Reserved – Ryan Shaughnessy (2010).