Top Pitfalls in Preparing Lady Bird Johnson Deeds

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By John A. Facey, III, Esq., John C. Newman, Esq., and Heather Z. Cooper, Esq.

From a real estate attorney’s point of view, we understand that a conveyance or mortgage by a life tenant of the fee title to property in which the life tenant holds his or her interest is a valid conveyance if the life tenant was granted or reserved the right to sell the entire property thereby divesting the remainder-persons of the remainder interest, provided, however, that the life tenant complied with any requirements imposed in the instrument creating the life estate and remainder .

Having worked with Lady Bird Johnson deeds (as we term them in our office), we offer this personal list of what we perceive to be the top pitfalls in preparing such conveyances.

1. Creating a Title Defect with a POA. According to our real estate department, an individual signing as the agent under a durable power of attorney to convey the principal’s residence into a life estate where the agent was one of the remaindermen has made title to the property conveyed unmarketable under customary Vermont title standards. Evidently, the Title Standards Committee has not addressed this issue directly because use of a power of attorney to convey to oneself is considered such a “no-no” as to not need mention. Many title insurance companies will refuse to insure over such conveyances. This issue should be anticipated when preparing the short form power of attorney preferred for filing with the land records.

2. Overpaying PTR Tax. There is a Property Transfer Tax exemption for transfers to close family members, defined as “transfers between husband and wife, or parent and child, or child’s spouse, or grandparent and grandchild, or grandchild’s spouse, without actual consideration (32 V.S.A. § 9603). When the transfer is not exempt under § 9603, the PTR tax of 1 .25 percent is imposed on the actuarial value of the remainder interest. We understand from our conversations with the Vermont Department of Taxes that the value for PTR purposes of the transfer to non-exempt remaindermen will be the value determined by IRS life tables.

3. Getting the Unilateral Transfer by Life Estate Holder Language Right. The terminology used for the grant and the reserved rights under an LBJ deed have evolved over time, from the very simple and direct statement of the reserved right to more complex expressions of the reservation and the procedures to implement the sale or mortgage. For illustration purposes (and not as legal advice), we attach a form that contains sample language . As you can read, we
believe you should consider language in the reservation to the Grantor, a statement that the Grantor may convey the property “without joinder by the remaindermen”. It would be unfortunate to draft a Lady Bird Johnson deed and find that the Grantor could not transfer the property and retain all the proceeds because one of the remaindermen (who some real estate lawyers may contend hold a right to oppose the transfer) refuses to execute a deed.

4. Wrong Party for Town Taxes. Because the Grantor has retained most indicia of ownership (with the principal exception of the right to convey the premises to whom she wishes upon her demise), for town tax purposes, the property should be listed in the name of the Grantor. We have known some town clerks who have read the Lady Bird Johnson deed as a complete conveyance to the remaindermen and listed the remaindermen as the owners for town taxes. A cover letter to the town clerk who will record such deeds should help in avoiding such problems.

5. Title Search. We have found “remaindermen” to be rather unsympathetic to the lawyer who transfers the deceased parent’s property without a title search only to find the property is not immediately transferrable even where the lawyer can show that he advised a search but it was declined by the client. Our real estate department tells us there can be problems with undisclosed mortgages, defective property descriptions, and even the legal fact that the elder does not own the property conveyed, for some reason or another. The fact that the elder refused to pay for the title search frequently fails to satisfy the remaindermen who are inconvenienced by the title defect (or worse). Consistent with the rules of professional responsibility, we attempt to insist that the elder pay for a title search and title insurance to make sure title is good at the point the property is transferred via the LBJ deed.

6. Banking View. Some banks look on LBJ deeds with a great deal of mistrust. While we understand that the federal government’s sponsorship of reverse mortgage products contains explicit permission to lend on a reverse mortgage to the holder of an enhanced life estate, non-specialized banks may refuse to lend to the life tenant. If a mortgage can be anticipated, we recommend discussing this subject with the bank before preparing the conveyance into a life estate.

7. Property Description. Although unlikely to escape the attention of the LBJ deed’s scrivener, a paralegal or successor attorney could flub the property description in a subsequent transfer or mortgage . The property description should reference the transfer into the grantor and not the conveyance out of the grantor to the remaindermen (except as a notation). Many mortgage deed property descriptions simply reference the land covered by the mortgage as that property “conveyed from [grantor] to [grantee] in a deed dated.”

8. Title Company View. Title companies tend to have varying requirements for issuing title insurance. Attorneys would be best advised to check with the title company with which they work most often before making any promises that the conveyance is insurable.

9. Marketability. Marketability can be an issue even though the transaction is insurable. When a property is listed for sale, a buyer’s attorney may insist upon the remaindermen joining in the deed even though the reservation language makes it perfectly clear that remaindermen do not need to join in the conveyance out. A tactic that might be considered for its legal sufficiency is having the remaindermen agreeing to arbitrate any differences over the estate they may have when the elder dies. Such a process may be quicker than family members suing each other in Superior Court.

10. Fraudulent Conveyance Law/Bankruptcy. Although we did not find any reported decisions under Vermont’s version of the Uniform Fraudulent Transfer Act (“UFTA”), cases in other jurisdictions have held that a debtor’s transfer to remainermen using an LBJ deed may qualify as a fraudulent transfer. As such, attorneys drafting such conveyances should consider the actual and potential creditors of the grantor when drafting an LBJ deed for a client. We would summarize the situation as follows. A transfer into an LBJ deed could be considered a fraudulent transfer if the transfer was: (1) conducted with actual intent to defraud a known creditor; or (2) made without receiving adequate compensation when the transferor should have known that he/she would thereafter incur debts beyond his/her ability to pay them as they mature.

An attorney preparing an LBJ deed should also consider the potential bankruptcy aspects of the conveyance. Schedule A of the bankruptcy petition explicitly requires that life estates be listed. Since the bankruptcy trustee will stand in the shoes of the debtor, the enhanced life estate can be sold. If the debtor elects to take the Vermont exemptions, the debtor may claim the $75,000 homestead exemption. Although likely not as much of an issue, the elder client might ask the attorney what would happen if a remainderman files for bankruptcy. Furture interests in real estate must be disclosed on Schedule A, as well. We do not see how a bankruptcy trustee can realize on such a contingent future interest, but in significant cases the issue might bear some analysis.

Lady Bird Johnson Deeds5 Top Pitfalls in Preparing Lady Bird Johnson Deeds

Lady Bird Johnson Deeds6 Top Pitfalls in Preparing Lady Bird Johnson Deeds

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