This site is dedicated to title issues, and particularly title searching.  Because I believe it is important to discuss issues that come up in the course of a title search, I have posted some hypothetical questions in the past that were inspired by actual searches.  We have discussed recording statutes and survivorship tenancy.  Most recently, I posted a hypothetical on life estates in the forums. 

This hypothetical is based on a fact pattern from an actual title search.  My first thought was "the client will certainly call me with questions on this one," so I thought it would make for a good discussion here.

Here is what the title search showed:

Alan owns a parcel of real estate. He conveys it to Betty and Carla reserving a life estate for himself. Betty, as duly appointed attorney-in-fact for Alan, conveys his life estate to the Family Trust.

 The question, then, is how is title to the real estate vested?  Obviously a trust does not have a "life," so can a trust even hold a life estate interest?  And, why would anyone convey a life estate to a trust?

It is helpful to break this down to understand it better.  Alan initially held title in severalty.  After the first conveyance, Betty and Carla held title as tenants in common, subject to the life estate of Alan.  Alan has a present possessory interest, the life estate, and Betty and Carla have a future interest, the remainder. 

After the conveyance of the life estate to the trust, Betty and Carla still hold title as tenants in common.  But now it is subject to the life estate pur autre vie of the Family Trust for the life of Alan.  Betty and Carla's future interest remains unchanged; their right to possession is still subject to the life of Alan. The only difference is that the right of possession is now held by the Trust, also measured by the life of Alan.

A life estate pur autre vie is a life estate that is measured by the life of another, rather than life of the person entitled to possession.    

So, why would anyone convey a life estate to a trust?  We can only speculate why this happened in this particular instance, but there could have been a good reason for it.

Assume that several years ago, Alan did some Medicaid planning.  His purpose was to get assets out of his name so he may qualify for Medicaid in the future without losing everything he acquired during his lifetime.  He deeded his real estate to his two daughters, but reserved a life estate so he could live in his home for the rest of his life. 

Years later, after the look back period, assume that Alan needed to apply for Medicaid to provide care.  He would have most likely have been denied because he still owns a substantial asset, the life estate.  Medicaid would likely require Alan to sell his life estate interest and use those funds for his care before they would begin paying benefits.  The obvious problem is - who would buy a life estate that is only good for Alan's life, knowing he could pass away at any time?  Medicaid would value the life estate based on actuarial tables using his life expectancy, but in the real world such an interest is practically impossible to sell.

Fortunately, the Family Trust has substantial assets.  Assuming that the trust is exempt from Medicaid, perhaps it is an irrevocable trust created by Alan's very wealthy late wife, the trust could buy the life estate from Alan for fair market value.  Alan can use the money to pay for his care, and after the appropriate spend-down, Medicaid will provide benefits.  And, the trust has the right of possession, so it can rent the home to recoup some of the cost of purchasing the life estate.

Or, maybe the life estate was conveyed to the trust before Alan needed Medicaid benefits.  If he makes it through the look back period without requiring benefits, the life estate will not be a counted resource.  This can be risky, however, because if Alan doesn't make it through the look back period he will face a period of ineligibility for the improper transfer.

The point is that we aren't always privy to the facts that motivated the real estate transactions we find on our searches.  Sometimes they make us scratch our heads and wonder "why would anyone do this?"  But, regardless of the reason we must determine what affect these conveyances have on title.