AVOIDING A COMMON MENTAL CAPACITY PITFALL
Sept. 14, 2021
One issue that I have noticed recently has to deal with the transfer of real property by an elderly person. The basic scenario is as follows:
Parent, usually as a form of inexpensive estate planning (and inevitably without the advice of a qualified estate planning attorney), decides to transfer their ownership interest in a piece of real property to their child or children by way of a Quitclaim deed. Sometimes they may also add the child/children as owners on the property. These types of deeds are generally not insured by title insurance.
Subsequently, the child either sells the property or re-finances an existing mortgage. This triggers a title search, and the title company starts asking about the Quitclaim deed that was executed by the parent. The title company asks for proof that the parent had capacity at the time they transferred the property to the child(ren).
The question I am usually asked is why the title company is asking for the additional information. Because the title company is going to issue a title insurance policy, they want to make sure that the chain of title is as clean as possible. Unfortunately, there are many cases of real estate fraud and far too many of them involve taking advantage of the elderly. Thus, the title company wants proof from the current owner that the current owner obtained their ownership interest in the property in the proper manner and that there was no fraud involved.
As you can see, this can cause a real problem. For example, what if the transfer occurred several years ago? What if the parent had mild cognitive impairment at the time of the transfer, but still had sufficient mental capacity? What if the parent had no cognitive impairment at the time of the transfer but now has severe cognitive impairment?
The best way to avoid this complication would be for the parent to consult an estate planning attorney and establish a comprehensive estate plan. Not only will the family avoid the issues with title, but they may also be able to take advantage of some tax savings if the planning is done properly. A good estate planning attorney will be able to advise the parent on issues relating to capacity during the consultation process.