"Ladybird" and "Enhanced Life Estate" Deeds
Validity, Use and Drafting Considerations in 2016 and Beyond
Common Law Authority
This discussion analyzes relevant cases and statutes concerning the likely efficacy in North Carolina of instruments reserving a life estate and reserving some form of a discretionary power of appointment. This discussion does not directly address the Medicaid or tax implications of these instruments. There does not appear to be clear modern authority addressing the validity of these instruments that is "on all fours" with the issue of the validity of a deed of real property reserving into the grantor a life estate coupled with the reservation of a power of appointment. However, the common law of North Carolina clearly holds that a life estate can be granted coupled with a power of appointment without merging the two into a fee simple absolute and there is no case suggesting that such reservations are not valid as effective conveyances for the purposes intended. The better question seems to be one of how they will be construed by the courts when questions arise as to how the interests vest under unanticipated circumstances and the rights of creditors seeking recovery of debts and obligations. Fortunately, recent legislation in the form of the North Carolina Uniform Powers of Appointment Act seems to unequivocally authorize such reservations and at the same time provides a framework for interpretation and reasonable amount of certainty.
"Ladybird" or "Enhanced Life Estate" deeds as they are commonly referred to in their most frequently used form should more properly be termed a reservation of a life estate coupled with a reserved power of appointment. Such a power may take several forms; a "nongeneral power of appointment" (N.C.G.S. Section 31D-1-102(10)) commonly referred to as a special power of appointment that limits how it can be exercised such as by deed, will or deed of trust or to whom it may be exercised in favor of the donor's heirs. The first example is a special power of appointment in gross and the second is a beneficial power of appointment. Another form is the general power of appointment that neither limits how, nor to whom, the property may be appointed; see: N.C.G.S. Section 31D-1-102(6) and Wachovia Bank & Trust Co. v. Hunt, 267 N.C. 173, (1966).
The right to grant general powers of appointment in a deed existed under the common law of England from a time predating the Statute of Wills, 32 Hen. 8, c. 1 (enacted in 1540) which first made it possible for landowners to determine who would own their land upon their death through a testamentary disposition by permitting a devise by will. Prior to the enactment of this statute, land passed at the death of the owner by the law of descent under the rule of primogeniture when the decedent landowner had competent living relatives surviving him. When a landowner died without heirs, the land escheated to the Crown. The use of a power of appointment in a deed permitted the landowner to circumvent the rule of primogeniture and to prevent escheat. Unlike a will, however, a deed in fee simple was not revocable and the landowner relinquished all control of the property. If a life estate was retained, the landowner enjoyed legal possession and the usufructs of the land, but possessed no right of testamentary disposition after the demise of the landowner who also potentially became liable for waste to the remainder interest owners.
N.C.G.S. Section 4‑1, adopted in 1778, establishes that the Common Law of England continues in force in North Carolina unless superseded. As we know of no cases or statutes to the contrary, these conveyances should be considered valid in North Carolina under the adopted common law if not for the many other sufficient reasons. The statute states that: "All such parts of the common law as were heretofore in force and use within this State, or so much of the common law as is not destructive of, or repugnant to, or inconsistent with, the freedom and independence of this State and the form of government therein established, and which has not been otherwise provided for in whole or in part, not abrogated, repealed, or become obsolete, are hereby declared to be in full force within this State. (1715, c. 5, ss. 2, 3, P.R.; 1778, c. 133, P.R.; R.C., c. 22; Code, s. 641; Rev., s. 932; C.S., s. 970.) "
However, we are not required to rely on this proposition alone in concluding that these instruments are enforceable as written and to be given effect. The rule with regard to testamentary grants as to whether the language creates a fee simple or life estate with power of disposition annexed is laid out clearly in Newland v. Newland, 1 Jones 463, 46 N.C. 463 (N.C., 1854) August 30, 1854: "'If an estate be given to a person, generally or indefinitely, with a power of disposition, it carries a fee, unless the testator gives to the first taker an estate for life only, and annexes to it a power of disposition of the reversion. In that case, the express limitation for life will control the operation of the power, and prevent it from enlarging the estate to a fee.'" (citations omitted.) Troy v. Troy, 60 N.C. 624 (1864), also clearly establishes that a testator may convey a life estate to a party coupled with an appurtenant power of appointment that does to merge to great a devise in fee simple. In Reid v. Boushall, 107 N.C. 345, 12 S.E. 324 (1890), the North Carolina Supreme Court recognized, without discussion, the ability of a grantor to create a life estate coupled with a power of appointment in the beneficiary of a deed to a trustee.
First Union National Bank v. Ingold 136 N.C. App. 270, (1999) is also a will case, but it is predicated upon a trust agreement which was funded by a deed. The Court of Appeals in upholding the power of appointment at issue cites Howell v. Alexander, 3 N.C. App. 371, (1969) which though not squarely on point with our discussion (it deals with a devise of the power to a life tenant in a will) it is somewhat dispositive of our question. The Howell Court quotes Am. Jur.: "An instrument, such as a deed or will, creating a power of appointment is to be interpreted so as to ascertain the intention of the donor and to give it effect unless some rule of law prevents. Effect should, if possible, be given to every word or clause in the instrument, so long as they are not inconsistent with the general intent of the instrument as a whole." 41 Am. Jur., Powers, § 9, p. 812; and then goes on the find the devise to be limited as stated and not the full fee
In Schaeffer v. Haseltine, 228 N.C. 484, 46 S.E.2d 463 (1948), the North Carolina Supreme Court acknowledged that one could devise a power of appointment annexed to a life estate and if not exercised, the property passed free of the power at the death of the life tenant. Smith v. Garey , 2 Dev. 42, 22 N.C. 42 (1838) clearly recognized the power of a grantor to transfer property in an inter vivos conveyance to a grantee for life while reserving a power of appointment. This case should be considered dispositive of the issue in North Carolina even though it did not involve a reservation of the life estate and power of appointment. While not directly on point to the question at issue, the North Carolina Supreme Court did consider the resulting title in construing a deed where the grantor reserved a power of appointment and the reservation was noted favorably in the opinion in Springs Et Ux v. Hopkins, 171 N.C. 486, 88 S.E. 774 (1916). Had the reservation of the power in the grantor been invalid, it would have led to a different outcome though the construction in question concerned different aspects of the conveyance.
For a case where such a conveyance may have avoided litigation, one should read Roper v. Edwards, 323 N.C. 46, (1988) and the underlying Court of Appeals opinion at 88 N.C. App. 149, (1987). In Wachovia Bank & Trust Co., N.A., Trustee v. Sevier, 41 N.C. App. 762, (1979) the Court of Appeals quotes the following language: "Where by the terms of the trust it is provided that the income shall be paid to the settlor for life and on his death the income or principal shall be paid to a designated third person, the settlor of course is not the sole beneficiary of the trust. So also where it is provided that on his death the principal shall be paid to his children or to his issue, he is not the sole beneficiary of the trust. This is true even though the settlor reserves a general power of appointment by deed or by will by the exercise of which he could exclude his children or issue. (Emphasis added.) II Scott on Trusts (3d ed.) § 127.1, p. 986-87." As the main issue presented in this case was who had to consent to a judicial revocation of an irrevocable inter vivos trust, the part of the quote applicable to deeds is obiter dicta , but interesting none the less and it supports the efficacy of these deeds.
For citations from other jurisdictions supporting such conveyances see: Oglesby v. Lee, 73 So. 840 (Fla. 1917) and Ricketts v. Louisville, St. L. & Ry. Co.,1 5 S.W. 182 (Ky. 1891). There is a 2007 slip opinion from the New York Surrogate's Court; In Re Estate of Mozer, 15 Misc.3d 1113(A), that upheld such a deed. Tobias v. Davis (In re Estates) (Mich. App., 2012) Michigan Court of Appeals held that grantor holding a life estate with reserved power of appointment effectively conveyed the fee simple by deed that did not reference the power of appointment. Cook v. Coburn , 97 A.3d 892, 2014 VT 45 (Vt., 2014) Vermont Court of Appeals held that in and equitable distribution action, an enhanced life estate deed conveyed an inchoate interest to the remainder interest owners and while the property itself was not marital property due to its inchoateness, it had value and that value should be considered by the court. (For cases holding the minority view contra, see: Lucareli v. Lucareli, 614 N.W 2d 60, (Wis. App. 2000) and Yordi v. Yordi, 217 P.2d 912 (Kan 1950).)
As to the question of whether these conveyances are testamentary instruments requiring the formalities of execution required of a Will, it would seem to be clear that as their development predates the ability to create a testamentary instrument and that the ability to create the same interest in a trust without meeting those requirements clearly answers the question in the affirmative. It has been held to not require such formalities in Florida in the case of Zuckerman v. Alter, 615 So.2d 661 (Fla. 1993). The North Carolina Uniform Trust Code clearly permits trusts to be created by deed (N.C.G.S. Section 36C‑4‑401) and as noted above and as provided in N.C.G.S. Section 36C‑8‑814, trustees may hold and exercise such powers.
Clearly, a grantor of real property should be able to reserve a power of appointment as a valid exercise of the grantor's right to limit the conveyance in certain respects as this right was recognized under the common law of England when our state was formed and neither our courts nor our Legislature have done so subsequently. It does not seem to violate the rule against perpetuities or to be an unreasonable restraint on alienation. These interests and interests in real property devolving from them should be insurable as long as no related problems as discussed further below should arise. Stated differently, landowners can make an effective reservation of a power of appointment, but whether they should reserve one should be considered carefully and the issues discussed with a knowledgeable attorney.
Statutory Authority and Limitations
NC Uniform Powers of Appointment Act
The 2015 North Carolina Uniform Powers of Appointment Act codifies much of the case law discussed above and creates definitions, powers and rules of interpretation that should simplify implementation of deeds reserving life estates coupled with powers of appointment as asset protection planning tools. Of great significance to asset protection planners, the Act also creates creditors' rights in property subject to a general power of appointment created by the power holder. The Act became effective on August 11, 2015 and other than as explicitly provided elsewhere in the statute, N.C.G.S. Section 31D-6-603 provides that it applies to a power of appointment whenever created. Rules of construction or presumption provided in the Act apply to an instrument executed before the effective date unless there is a clear contrary intent evidenced in the terms of the instrument or unless application of that rule of construction or presumption would impair substantial rights of a party created under any provision of North Carolina law in effect prior to the effective date of the Act. Actions taken before the effective date are not affected except as otherwise provided in the subsection.
N.C.G.S. Section 31D-1-104 incorporates the common law and principles of equity. "The common law and principles of equity supplement this Chapter, except to the extent modified by this Chapter or another statute of this State." N.C.G.S. Section 31D-2-201 codifies the creation of powers of appointment.
(a) A power of appointment is created only if all of the following apply:
(1) The instrument creating the power is valid under applicable law.
(2) Except as otherwise provided in subsection (b) of this section, the instrument creating the power transfers the appointive property.
(3) The terms of the instrument creating the power manifest the donor's intent to create in a power holder a power of appointment over the appointive property exercisable in favor of a permissible appointee.
General vs, Special Powers
N.C.G.S. Section 31D-1-102 contains the statutory definitions and defines an "Exclusionary power of appointment" as a power of appointment exercisable in favor of any one or more of the permissible appointees to the exclusion of the other permissible appointees and a "General power of appointment" as "a power of appointment exercisable in favor of the power holder, the power holder's estate, a creditor of the power holder, or a creditor of the power holder's estate." This is the form of reserved power of appointment most commonly seen in asset planning prior to the enactment of the Chapter.
It should be noted that in Howell v. Alexander, 3 N.C.App. 371, 165 S.E.2d 256 (1969) the North Carolina Court of Appeals states that a
"life tenant with such broad discretionary powers of disposition as are contained in this will administers the life estate property in the nature of a trustee for the benefit of herself and the remainderman. And, although she may have the unbridled discretion to subject the entire estate to her own use during her lifetime, even to the extent of a complete dissipation of the estate, she cannot take title in herself to the exclusion of the interest of the remainderman." (citations omitted.)
There is qualifying language in this opinion that suggests that one can draft around this construction, however, it must be done explicitly.
Clearly, in the context of a general power of appointment, the Act reverses the Howell presumption in N.C.G.S. Section 31D-2-203 by eliminating any implicit fiduciary obligations.
Presumption of unlimited authority.
Subject to the provisions of G.S. 31D-2-205, and unless the terms of the instrument creating a power of appointment manifest a contrary intent, the power is all of the following:
(1) Presently exercisable.
(3) Except as otherwise provided in G.S. 31D-2-204, general.
The exceptions to presumption of unlimited authority that are set out in N.C.G.S. Section 31D-2-204 are not raised by implication and only exist where the terms of the instrument creating a power of appointment clearly and explicitly manifest a contrary intent on the part of the grantor to limit authority of the holder of the power of appointment or where both (a) The power is exercisable only at the power holder's death and (b) The permissible appointees are a defined and limited class that does not include the power holder's estate, the power holder's creditors, or the creditors of the power holder's estate. Further, N.C.G.S. Section 31D-3-305 states:
N.C.G.S. Section 31D-3-305. Permissible appointment.
(a) If a power holder of a general power of appointment permits appointment to the power holder or the power holder's estate, the power holder may make any appointment, including an appointment in trust or an appointment that creates a new power of appointment that the power holder could make in disposing of the power holder's own property.
(b) If a power holder of a general power of appointment permits appointment only to the creditors of the power holder or the creditors of the power holder's estate, or both, the power holder may appoint only to those creditors.
(c) Unless the terms of the instrument creating a power of appointment manifest a contrary intent, the power holder of a nongeneral power may:
(1) Make an appointment in any form, including an appointment in trust, in favor of a permissible appointee.
(2) Create a general power in a permissible appointee.
(d) The terms of the instrument may permit the power holder of a nongeneral power to create a nongeneral power in any person to appoint to one or more of the permissible appointees of the original nongeneral power.
Typically, the property owner engaged in asset protection planning harbors an intention to retain as much control over the property as the planning process will allow. As a result, planners have recommended use of deeds reserving a life estate and reserving a general power of appointment in order to exclude the property from the owner's estate administration as an asset protection a planning device while retaining as full control over the property. As we will discuss in the subsequent sections dealing with creditors' rights, this may no longer be the default choice.
Challenges to Capacity
If the remainder interest grantees are not the same persons who would otherwise inherit without the deed, there exists the potential for a contest challenging the validity of the deed based upon allegations of undue influence or lack of capacity. Thus a client for whom such an instrument has been proposed will need to be advised as to such a possibility. It is axiomatic that "Bad facts make bad law" and as a result one should be concerned that an exercise of such a power vesting the property in any persons other than the remainder interest owners, the grantor's intestate heirs or the devisees under a valid will, may also give rise to a challenge alleging lack of capacity, incompetence or undue influence and asking a court to set aside the instrument. Thus, exercising the power in such a fashion may present a problem for the grantees in securing title insurance for a subsequent purchaser without curative instruments such as a quit claim deed or estoppel agreement from the excluded heirs. If such conveyances are actually challenged by litigation of these issues, the Act does not provide any safe harbors.
There are several other issues that should be considered in advising clients on the suitability of utilizing these conveyances. One such concern is the effect of N.C.G.S. Section 31-43 upon a reserved general power of appointment in the life tenant. That statute provides that a general devise of the testator's real estate operates as an exercise of such a power, unless a contrary intention is evidenced by the will. Wachovia Bank & Trust Co. v. Hunt , 148 S.E.2d 41, 267 N.C. 173 (N.C., 1944) states that that the first version of this statute was identical with § 27 of the English Wills Act of 1837 (7 Wm. IV & 1 Vict., Ch. 26). It suggests that:
"...this Act was passed to guard against the inadvertence of a life tenant with a general power of appointment. Accustomed throughout his life to treating the land as if it were his in fee, he might overlook making a specific appointment of the particular property and attempt to dispose of it by a general devise. In such event, if he owned other property which would pass under the devise, the power remained unexecuted and his devisees lost the property by his default."
This doctrine is addressed similarly in the new Act's treatment of residuary clauses, but will clarify the application of the default disposition rules in the case of deeds reserving a life estate and reserving a power of appointment. N.C.G.S. Section 31D-3-302 defines the manner in which the power holder's intent to exercise a power of appointment is determined from a residuary clause stating:
A residuary clause that does not contain a blanket-exercisable clause or specific-exercise clause manifests the power holder's intent to exercise a power of appointment only if all of the following apply:
(1) The terms of the instrument containing the residuary clause (including any valid codicil or amendment to the instrument) do not manifest a contrary intent.
(2) The power is a general power exercisable in favor of the power holder's estate.
(3) There is no gift-in-default clause or the clause is ineffective. (emphasis added)
(4) The power holder did not release the power
Thus, if a general power of appointment is reserved in a deed of a remainder, the remainder interest will be the " gift-in-default clause", such that a general devise of the testator's real estate in a residuary clause should no longer create a question of whether an exercise of the power of appointment has occurred by operation of the statute.
Since as noted, the typical intent of the life tenant utilizing a reserved power of appointment as an asset protection a planning device is to retain as full control over the property as planning concerns will allow, the objective can be met with respect to this issue by the use of a general power of appointment. However, as further discussion will disclose there well may be reasons to consider avoiding the use of a general power of appointment. A special power of appointment is also not exercised by a general devise of real estate as discussed above, and as a result, a special power of appointment should ordinarily be considered as an option in order to avoid creditors issue discussed below.
Exercise of a Power of Appointment
In Tocci v. Nowfall, 220 N.C. 550 (1942) the North Carolina Supreme Court clearly explained how one may effectively exercise a power of appointment in favor of a grantee. The clear rule carved out by the North Carolina Supreme Court is simply that any conveyance of the property subject to a power of appointment exercises that power and the conveyance does not necessarily have to expressly reference the power where the only reasonable reference is that it was in fact intended to have been an exercise of the power. N.C.G.S. Section 31D-3-304 seems to make allowance for the failure of a power holder to make specific reference in an exercise of the power of appointment even when explicitly required to do so by the instrument granting the power. The proviso states: "A power holder's substantial compliance with a formal requirement of appointment imposed by the donor, including a requirement that the instrument exercising the power of appointment make reference or specific reference to the power, is sufficient if both of the following apply: (1) The power holder knows of and intends to exercise the power. (2) The power holder's manner of attempted exercise of the power does not impair a material purpose of the donor in imposing the requirement." In either case, compliance and intent would be a question of interpretation of an instrument intending to exercise a power and any such instrument would advisedly expressly say so.
In addition, the grantors' intent to retain control of the property will often be evidenced by reserving the power to use the property as collateral for a loan. In order to provide for such instances, great care should be taken to expressly provide in the reservation of the power that any grant by the life tenant's to a trustee of a deed of trust is merely a conditional grant, effective only upon foreclosure and terminating upon satisfaction or redemption of the deed of trust, otherwise it would likely be construed as exercising the power of appointment and terminating the remainder interest as North Carolina is a title theory jurisdiction. See: Ferrell v. Metro. Life Ins. Co, 190 S.E. 746, 211 N.C. 423 (N.C., 1937). It well might be considered prudent to track such language in the deed of trust as a precaution. As note above and discussed below, such a reservation may have implications with respect to creditor's claims.
Life Tenant's Creditors' Claims
Another concern is the effect of a judgment lien docketed against the life tenant, could it be construed as attaching to the remainder as well? In theory, if executed upon, the judgment creditor would hold what the life tenant held and, thus, could arguably exercise the power. Additionally, in previous discussions addressing the drafting, use and efficacy of instruments in which grantors have reserved a life estate coupled with a reserved power of appointment for asset protection planning purposes, we have expressed concerns about the potential for a judicial application of the analysis set out in Livesay v. Carolina First Bank, (discussed in a subsequent section) with respect to the claims of the creditors of the estate of a deceased life tenant. In that case, the North Carolina Court of Appeals declared that the personal representative of a decedent was entitled to sufficient assets of the decedent's revocable trust to satisfy the claims of creditors of the decedent's estate where there were insufficient estate assets. This decision was partially predicated on the reasoning that since the decedent had complete control over the disposition of the assets that constituted the corpus of the revocable trust right up to the moment of death, that control entitled the creditors of the decedent a remedy where the estate was insufficient to satisfy their claims. This issue has not been decided in North Carolina, but this approach reflects the general rule on donative transfers. (See: Restatement Third of Property: Wills and Other Donative Transfers § 22.2 and Commentary.)
The possibility of imposing a remedy for creditors of a deceased grantor having reserved a life estate coupled with a reserved power of appointment is now more than merely theoretical and the Act has made the creditor's remedies applicable to the life tenant as well as a deceased life tenant's estate creditors in certain instances. N.C.G.S. Section 31D-5-501 clearly addresses this concern with respect to a general power. Pursuant to the Act, property subject to a general power of appointment created by the powerholder is "subject to a claim of a creditor of the power holder or of the power holder's estate to the extent provided in the Uniform Voidable Transactions Act..." other than voidable transfer, such property is not subject to a claim of a creditor of the power holder or the power holder's estate to the extent the power holder irrevocably appointed the property in favor of someone other than the power holder or the power holder's estate. When a third party creates the general power, the rights of the power holder's creditors are a bit more limited under N.C.G.S. Section 31D-5-502.
N.C.G.S. Section 31D-5-501 provides, in part, as follows:
Creditor claim; general power created by power holder.
(a) In this section, "power of appointment created by the power holder" includes a power of appointment created in a transfer by another person to the extent the power holder contributed value to the transfer.
(b) Appointive property subject to a general power of appointment created by the power holder is subject to a claim of a creditor of the power holder or of the power holder's estate to the extent provided in the Uniform Voidable Transactions Act, Article 3A of Chapter 39 of the General Statutes.
(c) Subject to subsection (b) of this section, appointive property subject to a general power of appointment created by the power holder is not subject to a claim of a creditor of the power holder or the power holder's estate to the extent the power holder irrevocably appointed the property in favor of a person other than the power holder or the power holder's estate.
(d) Subject to subsections (b) and (c) of this section, and notwithstanding the presence of a spendthrift provision or whether the claim arose before or after the creation of the power of appointment, appointive property subject to a general power of appointment created by the power holder is subject to a claim of a creditor of:
(1) The power holder, to the same extent as if the power holder owned the appointive property, if the power is presently exercisable.
(2) The power holder's estate, to the extent that the estate is insufficient to satisfy the claim and subject to the right of a decedent to direct the source from which liabilities are paid, if the power is exercisable at the power holder's death.
Subsection (b) eliminates the question now in North Carolina of the general rule that a donor of a power of appointment cannot use an avoidable transfer to limit the reach of creditors. If the donor's conveyance reserves a life estate and retains a power of appointment, the donor's creditors and the creditors of the donor's estate may reach the appointive property as provided in the Avoidable Transfers Act.
Subsection (c) also clarifies the application in North Carolina of the well-settled rule that if there is no fraudulent transfer, and the donor/powerholder has made an irrevocable appointment to a third party of the appointive property, the appointed property is beyond the reach of the donor's creditors and the creditors of the donor's estate. Simply stated, an irrevocable and nonfraudulent exercise of the general power in favor of someone other than the life tenant or the life tenant's estate eliminates the ability of the life tenant's creditors or the creditors of the life tenant's estate to reach the property. Typically these instruments are not done at an time when the donor is insolvent or with "intent to hinder, delay, or defraud any creditor" of the donor, so as long as the appointment is exercised in favor of a third party purchaser for value or as security for a loan and the life tenant received a "reasonably equivalent value in exchange for the transfer", it should not be considered an avoidable transfer.
Subsection (d) clarifies that where the donor has retained a presently exercisable general power of appointment, has not made an avoidable transfer and has not irrevocably exercised the appointment, the property is reachable by a creditor of life tenant free of the remainder interest. If the life tenant retains a general power of appointment exercisable at death, the real estate subject to the power of appointment remains subject to the claim of creditors of the donor's estate to the extent the assets of the estate are insufficient.
Subsection (a) contains a substance over form rule where the general power was not created in a transfer made by the powerholder, but where the life tenant contributed value (purchase money) to the transfer. The following examples are illustrative and are taken directly from the Comment to the Uniform Powers of Appointment Act promulgated by the National Conference of Commissioners on Uniform State Laws (NCCUSL) (which, in turn, drew them from those set out in the Restatement Third of Property: Wills and Other Donative Transfers § 22.2, Comment d.)
Example 1. D purchases Blackacre from A. Pursuant to D's request, A transfers Blackacre "to D for life, then to such person as D may by will appoint." The rule of subsection (d) applies to D's general testamentary power, though in form A created the power.
Example 2. A by will transfers Blackacre "to D for life, then to such persons as D may by will appoint." Blackacre is subject to mortgage indebtedness in favor of X in the amount of $10,000. The value of Blackacre is $20,000. D pays the mortgage indebtedness. The rule of subsection (d) applies to half of the value of Blackacre, though in form A's will creates the general power in D.
Example 3. D, an heir of A, contests A's will on the ground of undue influence on A by the principal beneficiary under A's will. The contest is settled by transferring part of A's estate to Trustee in trust. Under the trust, Trustee is directed "to pay the net income to D for life and, on D's death, the principal to such persons as D shall by will appoint." The rule of subsection (d) applies to the transfer in trust, though in form D did not create the general power. The provisions of this section are designed to be consistent with Uniform Trust Code § 505(a).
It is extremely important to be very clear that the rights of a creditor are not automatic and that the neither the Uniform Avoidable Transfers Act, nor the Uniform Powers of Appointment Act create a lien on the property subject to a reserved life estate coupled with a general power of appointment. In all instances a creditor of the life tenant must file an action seeking recovery of the debt, and avoidance of the transfer pursuant to the Uniform Avoidable Transfers Act, and establishment of a lien against the subject property as relief in the action. To be effective the action must make all remainder interest owners and record lien creditors a party and they must all be properly served.
The Uniform Avoidable Transfers Act applies pursuant to N.C.G.S. Section 39-24.4(a) even when the debt being sought to be recovered arose after the transfer being sought to be avoided "...if the debtor made the transfer... [w]ithout receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor... [i]ntended to incur, or believed that the debtor would incur, debts beyond the debtor's ability to pay as they became due."
In addition, the creditor making a claim for relief under subsection (a) has the burden of proving the elements of the claim for relief by a preponderance of the evidence. Since the fact that a debtor transferred the assets in the course of legitimate estate or tax planning is a statutory consideration, it can be assumed that in order to prove the elements of the claim, the creditor must establish that the exceptions to the UATA don't apply because typically the transfer will have occurred prior to the debt obligation having been incurred.
Not all reserved powers of appointment will result in the transferred property being available to creditors of the donor. N.C.G.S. Section 31D-5-502 provides:
N.C.G.S. Section 31D-5-504. Creditor claim; nongeneral power.
(a) Except as otherwise provided in subsections (b) and (c) of this section, appointive property subject to a nongeneral power of appointment is exempt from a claim of a creditor of the power holder or the power holder's estate.
(b) Appointive property subject to a nongeneral power of appointment is subject to a claim of a creditor of the power holder or the power holder's estate to the extent that the power holder owned the property and, reserving the nongeneral power, transferred the property in violation of the Uniform Voidable Transactions Act, Article 3A of Chapter 39 of the General Statutes.
(c) If the initial gift in default of appointment is to the power holder or the power holder's estate, a nongeneral power of appointment is treated for purposes of this Article as a general power.
Appointive property subject to a nongeneral power of appointment is, therefore, exempt from a claim of a creditor of the power holder or the power holder's estate except to the extent that the powerholder owned the property and, reserving the nongeneral power, transferred the property in violation of the Uniform Voidable Transactions Act or when the initial gift in default of appointment is to the power holder or the powerholder's estate, whereupon it is treated as a general power under the Act.
In order to obtain the maximum asset protection, great care will need to be taken in the drafting of these instruments and the client will need to be well informed as to the limitations of the instrument's protection as well as the reach of the claw back provisions of the Avoidable Transfers Act. End of life asset protection planning documents are most often conceived of and referred to as a "Probate avoidance tools". Technically, That language is correct...Probate is not required to transfer the property at the death of the life tenant. However, to the extent that they are also utilized to avoid estate administration, the usage may be fallacious since an estate administration may now likely be required in order to cut off the claims of creditors with any assurance.
Creditors of the Remainder Interest Owners
An additional concern in this vein is the possible results of the docketing of a judgment against the holder of the remainder interest prior to the death of the life tenant. The question is raised whether or not this judgment becoming a lien on the property preventing the exercise of the power of appointment by the life tenant. Since the remainder is actually an inchoate interest until the death of the life tenant power holder coupled with a failure to exercise the power, it would clearly seem that if the life tenant exercises the power of appointment, it operates to revoke the remainder interest, defeating the attachment of the lien; see: Smith, supra. On the other hand, if the life tenant dies prior to the remainderman, the judgment having attached to the contingent remainder would certainly become executable. Most title insurers will not be likely to be inclined to insure over some of these issues in advance of a court decision, leaving many such issues concerning these deeds unresolved. Likewise, IRS tax liens against ether party will likely be considered as attaching under the Federal decisions in Drye and Craft.
A further concern involves the possible death of the remainderman before the life tenant. Since the life tenant may revoke the interest of the remainderman at any time, some argue that no interest in the property vested in the remainderman and it therefore, does not go into the probate estate of the predeceasing remainderman. However, the better analysis seems to be that the remainder interest was vested subject to divestment and therefore the remainderman having died with a vested interest, requires probate of the remainderman's estate.
It has been suggested that any deed reserving a life estate coupled with a power of appointment should also contain language absolving the life tenant from waste, i.e. "without liability for waste", permit mortgaging, leasing with or without consideration and also specifically grant authority to any attorney in fact to exercise the power in favor of any desired beneficiaries with or without consideration including gratuitous conveyances to the AIF where appropriate. This may be fully resolved by N.C.G.S. Section 31D-3-305. Pursuant to this section the holder of a general power that permits self-appointment or appointment to the power holder's estate, may make any appointment that the power holder could make in disposing of the power holder's own property. However, this language would have to be limited greatly if creditor protection is to be the primary thrust of the planning these provisions would render the power subject to such claims.
Finally, clients considering the use of this planning device often do so in order to provide a measure of certainty in the disposition of property after death without relinquishing full control of the property. In addition to the issues already discussed, attorneys should advise their clients that even when title insurers are willing to insure dispositions of the property by the life tenant without joinder of the holders of the remainder interest, certain lenders and purchasers may not be willing to accept a conveyance without such joinder as a practical matter.
Many people attribute the term "Lady Bird" deed to the legend that President Johnson once used this type of deed to transfer property to his wife, "Lady Bird" Johnson or that she did so in disposing of land to the U.S. government. There is no evidence that this ever occurred. In reality, the first modern use of a Lady Bird deed for asset protection was after forms were drafted by Florida attorney Jerome Ira Solkoff around 1982, nearly ten years after the death of President Johnson. In his elder law book and lecture materials, Solkoff used a fictitious cast of characters with the names Linton, Lady Bird, Lucie, and Lynda among others in examples explaining the usefulness of this new type of deed, and the name has become popularly associated with the deed.