A Lady Bird Deed commonly referred to as an Enhanced Life Estate Deed, is a type of estate planning resource that allows a property owner (the creator of the document) to transfer property, upon death, to named beneficiaries without going through the long and expensive probate process.
Before the creator’s death, the document allows the owner to retain complete control over their property.
Such a deed is a real estate planning tool only approved and authorized in a few states.
These states include:
- Michigan
- Florida
- Texas
- West Virginia
- Vermont
A lady bird deed can also be referred to as the following:
- A lady bird trust
- Enhanced life estate deed
- Transfer On Death (TOD) deed
Why is the Lady Bird Deed Only Available in 5 States
These deeds are only recognized or available in five states because title insurance companies in those states insure the title that passes through the deed. Other states will not, and therefore such kinds of deeds are avoided. Although there are no laws that prevent someone in a state that does not recognize lady bird deeds from executing one, the deed may result in an insurable title that ultimately reduces the property’s value or requires expensive court proceedings to straighten out.
did you know
The term “lady bird deed” comes from a fact pattern that was used by a Florida-based attorney named Jerome Ira Solkoff, who preferred to use fictional characters to illustrate the use of this estate planning resource.
One such character was the former United States President Lyndon Johnson’s wife, Lady Bird Johnson. As a result, the term became popular, and most people began to refer to the deed as the “Lady bird deed”instead of its formal name, “enhanced life estate deed.”
Lady bird Deed V/S Traditional Life Estate Deed
A life tenant or property owner can transfer property or a remainder interest to the remainder beneficiaries but retain life estate using both the lady bird deed and the traditional life estate deed.
However, a lady bird deed differs from a life estate deed. The life tenant still reserves the right to mortgage, sell or give away the property to another person without involving the beneficiaries or their consent. With a traditional life estate deed, the property owner does not reserve these rights.
How the Lady Bird Deed Works
This deed allows a property owner (the life tenant) to transfer a remainder interest in real estate to beneficiaries but reserve a right to occupy and use the property during their lifetime (life estate) and the right to sell or mortgage the property or change the remainder beneficiaries at will. In addition, since the life estate retained by the life tenant is enhanced, they can also gift the property to another person without the permission or involvement of the remainder beneficiaries.
If the life tenant dies without revoking their deed, the property’s title and ownership rights are automatically passed to the remainder beneficiaries by operation of law without probate.
The two main features of the deed are retained control during life and automatic transfer upon the life tenant’s death, making it a popular estate planning resource within the five states that authorize its use.
Medicare-Related Reasons to Use Lady Bird Deed
These deeds can be very beneficial to a property owner who wants to transfer their property to a beneficiary but may need to apply for Medicaid soon after that.
The following are the two primary Medicare-related reasons for using the lady bird deed:
Medicaid eligibility
Medicaid benefits are proposed for people who cannot otherwise pay for their medical care. Therefore, if an individual applies for Medicaid benefits, they must declare their current financial status and the property they own.
However, some assets are not counted for Medicaid eligibility purposes, including a life tenant’s residence. The residence may be wholly exempt or exempt up to a particular value. Individuals who apply for Medicaid benefits must also declare any assets they have given away within five years, called the look-back period.
If they have given away any valuable property and claimed poverty to receive Medicaid, the look-back period may disqualify them from receiving benefits over a certain period.
However, suppose an individual executes only a lady bird deed to transfer valuable property to beneficiaries. In that case, the transfer will not need to be disclosed to Medicaid since the original creator retains complete control over the property during life. This helps the life tenant qualify for medicaid while still protecting their homes as an inheritance for their remainder beneficiaries.
Medicaid recovery of assets
A lady bird deed becomes a valuable tool to the life tenant’s remainder beneficiaries upon the grantor’s death. If the life tenant receives Medicaid benefits during life and eventually dies, the estate will claim for repayment from the assets left behind. Some states may make payment claims from property that goes through probate, whereas others may make claims on any property left behind-whether it goes through probate or not.
Executing this deed means that the property will automatically be transferred to the named beneficiaries without probate upon the grantor’s death.
Suppose the life tenant’s state of residence does not seek reimbursement from non-probate assets. In that case, the beneficiaries will get their inheritance without repaying the government for the Medicaid benefits received while the grantor was alive.
Advantages/Benefits of the Lady Bird Deed
This can be incredibly useful in transferring real estate property to loved ones after the life tenant’s passing.
The following are the main advantages/benefits of using this deed:
Avoid long and expensive probate process
It allows the life tenant to retain control of their property during lifetime and transfer the property to remainder beneficiaries upon their death, outside of probate. This helps the owner avoid concerns about cost, delays, and privacy associated with the probate process.
Help grantors to retain control over property
A significant benefit of using an enhanced life estate deed over the traditional one is retaining authority over the property during the tenant’s life. Whereas a traditional life estate deed allows the life creator to use the property during their life, the grantor no longer holds the right to revoke the deed.
However, with a lady bird deed, the grantor can convey a future interest in the property and maintain life estate, meaning that they may sell, use, mortgage, gift the property to someone else, or revoke the remainder beneficiary’s interest without requiring their consent or involvement.
Helps with medicaid planning
The use of the standard life estate deed usually triggers a five-year waiting period for Medicaid benefits. However, an added advantage of using the deed is that the creation and use of such a document are usually not considered a transfer of ownership when applying for Medicaid benefits. This helps the grantor avoid the five-year penalty period because the gift can permanently be revoked.
Lady bird deeds can also help with Medicaid asset protection, as it allows the grantor to transfer property rights to their beneficiaries while still maintaining authority over the given property. Upon the grantor’s death, the deed also helps to keep assets within the family that would, under other conditions, be taken away by the government to repay the Medicaid benefits received.
Federal tax planning
Normally, there are no tax consequences to an enhanced life estate deed as there is no completed gift for estate tax purposes.
However, this has two main tax benefits:
- There is no need to pay any gift tax or file a gift tax return on the transfer. This is mainly because tax laws treat the original owner as still owning the property until death, and it is as if the owner never transferred the property during their lifetime.
- Beneficiaries who receive property through the lady bird may receive a stepped-up tax basis, which avoids payment of significant capital gain taxes.
Property tax planning
Some states, including Texas, Michigan, and Florida, cap the local taxing authority to increase property value when assessing property taxes on a personal residence. Provided that the cap is in place, the local taxing authority cannot exceed the increase specified in the cap, even if the property’s value exceeds the covered amount.
In states where property value appreciates, the cap on increased property taxes provides an extra layer of protection to the homeowner. However, this benefit is often lost when the homeowner transfers their ownership rights to a new person. In such cases transferring property using the deed may help avoid property tax uncapping of the transferred property.
Cost-effective estate planning tool
A lady bird deed is ideal for property owners whose principal asset is only their primary home. The deed accomplishes a similar outcome to a living trust- avoiding the lengthy and expensive probate process during property transfers. Still, it is less expensive compared to a living trust.
Can reduce risk/avoid capital gain tax
These deeds make it possible for property owners to add their children’s names to the deed and make them joint property owners. When a grantor names their kids as joint owners to a given property, they gain a present ownership interest in the property. Nevertheless, this can be risky, especially if the children go through bankruptcy or divorce proceedings or are sued.
However, additional risks are reduced with the deed as property can only be transferred upon the grantor’s death, and the children don’t have a present ownership interest in the home. In addition, an enhanced life estate deed can help reduce future capital gains taxes on the sale of a property owner’s asset, can avoid uncapping of taxes, and also does not count against gift tax exemptions until the grantor dies.
Retained homestead exemption
Most states, including Texas, provide favorable status to property used as a grantor’s principal residence, also known as the grantor’s homestead. In such states, principal residences typically qualify for lower tax assessment and qualify for special creditor protections. In addition, since the owner of an enhanced life estate deed retains control of the homestead during their lifetime, they can exploit the property tax exemptions provided within their state.
Saves legal fees
A living trust deed can also help a property owner transfer property to beneficiaries without going through the court probate process. However, whereas it enables the grantor to achieve almost all the benefits of using the deed, a living trust usually requires the creator to create the trust, followed by a separate deed needed to transfer property into the trust.
This two-step process of executing a living trust often requires an attorney who might charge more legal fees than preparing a deed.
Disadvantages of Lady Bird Deed and its Alternatives
This deed also presents several drawbacks to both the life tenant and the remainder beneficiaries.
The following are some of the significant disadvantages during property transfer:
Lack of asset protection/home refinance issues
Whereas the enhanced life estate deed allows a property owner to refinance, sell, give away, or mortgage their home without the joining of the remainder beneficiaries, some creditors may not allow a mortgage on a property where a lady bird deed has been imposed. In addition, some title insurance companies may also be reluctant to provide title insurance on a property where this deed has been used.
Ineffectiveness against constitutional restrictions
In some states, such as Florida, a grantor cannot use this deed to disinherit a spouse or a minor child. Therefore, individuals who want more flexibility may benefit more from a living trust than a lady bird deed.
Flexibility issues
If a grantor wants to leave property to more than one grantee or beneficiary, the deed may not be a flexible or the easiest solution. In such cases, the execution of a living trust is encouraged.
Ownership of multiple assets
If the grantor owns many assets, executing a lady bird deed as an estate planning tool may not be enough to protect the family from probate. Moreover, if the grantor wants to control the beneficiaries to receive the property (for example, at the age of 18), protect the beneficiaries from creditors, bankruptcy, or divorce upon their death, or if they want to maintain the ability of the heirs to continue receiving needs-based Medicaid benefits, a deed might not be effective. In such instances, the use of a living trust may be considered a wise choice.
Unexpected deaths
Suppose the remainder interest holder dies unexpectedly before the life tenant dies. In that case, it may be legally unclear what will happen to the property when the original owner later dies.
Alternatives to Lady Bird Deeds
As already discussed, these deeds are not very popular estate planning resources. However, estate planners use them in the five states where they are authorized. Therefore, if a grantor wants to use the enhanced life estate deed to transfer property to beneficiaries, it is prudent to engage a local lawyer and find out whether the deed is authorized in the given state and if it is a good idea to create one based on the situation at hand.
An excellent alternative to the lady bird deed can be the use of the transfer-on-death deed. Suppose the grantor’s state specifically authorizes such deeds. In that case, it can be a more uncomplicated and more readily accepted strategy of transferring property while avoiding probate and still qualifying for Medicare-related benefits of this deed.
Lady Bird Deed and Warranty of Title
Deeds are often named after the feature that defines them.
EXAMPLE
A warranty of title deed is a document used when buying a home.
A homeowner purchases insurance and pays a premium for a title insurance policy via the title company. Title insurance policy ensures that if someone files a claim to own the house, the homeowner can submit a claim under their title insurance policy, making the title company responsible for defending against the claim or reimbursing the homeowner the purchase price for the house.
On the contrary, it is a document that permits property owners to transfer their property to beneficiaries without probate. The deed permits the grantor to retain all rights over their home while they are still alive. Upon their death, the home by-passes probate and automatically transfers over to the named beneficiary. The probate avoidance feature of the enhanced life estate/lady bird deed is independent of the warranty of title. Since the same deed can have different features, two names may correctly apply to the same deed; for example, a lady bird deed may also be a quitclaim deed.
Relationship to Last Will and Testament
The enhanced life estate deed allows a property owner to transfer property to grantees outside of probate. This means that the lady bird trust is a non-probate transfer. Since a last will only control assets that are part of the probate estate, the terms of a grantor’s last will and testament are irrelevant to a lady bird deed. The property will automatically transfer over to the remainder beneficiaries as stated in the deed, irrespective of what the will says when the life tenant dies. In addition, the personal representative named in the will has no control of the property named in the creator’s deed.
Frequently Asked Questions
Professional assistance may not be necessary when drafting and executing a lady bird deed as a property transfer tool. However, if one plans on using the deed as an estate planning tool for Medicaid, seeking professional counsel from a Medicaid planner is considered a wise choice.
Creating this deed is generally inexpensive. This is because one can prepare it independently, and the approximate cost can only be valued at $30. In addition, professional assistance from estate attorneys is also very affordable, and the average cost of creating the trust and filing it with the local register of deeds can be approximately $200 to $400.
Each state that recognizes lady bird deeds has its requirements for validity. These special requirements include the particular language to create the deed and state-specific requirements of all deeds, which includes: An accurate legal description, provision of a statement of consideration (if any), a specification of how joint owners will hold the title (in case multiple owners are involved), adherence to right font size and page format as per the specific state’s recording laws, indexing instructions and any other information that the state law may require, and finally, the grantor’s signature and notary acknowledgment that follows the state’s required format.
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