The Heritage Law Center, LLC Blog

Transferring Real Estate While Keeping Control: the Special Power of Appointment

POSTED ON: March 21, 2011

There are many reasons why a person might want to transfer their Massachusetts real estate as part of their overall estate plan. Perhaps they want to reduce the size of their estate in order to reduce estate taxes or to qualify for MassHealth (Medicaid) benefits. Perhaps they can no longer use or maintain the property or want to ensure their child or other loved one has a roof over their heads. No matter what your intention, when you deed your property over to someone else, you lose all control over that property. An outright gift or sale of real estate, even to a loved one, can have unpredictable outcomes and sometime people are more comfortable knowing that they still have some control over the situation. This can be accomplished using what is known as the Special Power of Appointment.

A deed with a Special Power of Appointment can be a useful method of sheltering your real estate. In practice, a deed of the property is made to your children or other beneficiary. In the deed, you retain a Special Power of Appointment, which, in effect, allows you to transfer ownership, even after the deed has been recorded, from your children to other persons. Basically, you are giving the property away while keeping the power to later change your mind.

Benefits of a Special Power of Appointment

The Deed with Special Power of Appointment has several advantages. First, the property is out of your name so that after the five year MassHealth look-back period, it will be safe from the nursing home, should you ever need long-term care. Second, the special power of appointment allows you to have some control over your children: if they act in ways that are against your interests, you can take the house away from them after the fact. Third, you retain the ability to protect the property should your children experience problems that could jeopardize their interest in it. If a child is sued, files for bankruptcy or divorce, becomes disabled or incompetent or undergoes some other change in circumstances or character, you can eliminate that child’s interest, set it up in trust for the child and/or their husband, wife, widower or issue, or can make it subject to a right of first refusal. Further, if your child were to predecease you, the Special Power of Appointment could eliminate their interest and avoid having the property enter probate.

The special power of appointment also preserves the property’s “stepped-up basis,” which is an important tax benefit that your children receive at your death. What this means is that at your death, the property will be treated by the IRS as if it had not been transferred, and the full fair market value of the property as of the date of death will be includible in your federal gross estate. Your children, therefore, will receive the property at its current day value rather than the appreciated value based on your original purchase price, thereby avoiding costly capital gains taxes.

Transferring real estate, however, is never without risks and any attempt to do so should be done in consultation with an estate planning attorney.