A Lady Bird Deed, also known as an “Enhanced Life Estate Deed,” is a form of estate planning to avoid probate when transferring real estate to your beneficiaries at your death. A Lady Bird Deed allows the owner to maintain control of the property until his or her death. At the property owner’s death, the property automatically transfers to the new owners without going through the very lengthy (and possibly very expensive) process of probate. (Lady Bird Deeds are available in Florida and a handful of other states.)
How Does a Lady Bird Deed Work?
A Lady Bird Deed divides ownership of real estate into different periods of time. The owner of the property maintains ownership of the property during his/her lifetime and then at death, ownership transfers to the beneficiary(ies). A Lady Bird Deed also allows the owner of the property to name one or more trusts, organizations or individuals to inherit the property at the owner’s death.
Lady Bird Deeds can be used as a simple, inexpensive estate planning tool when the residence is the primary asset of an estate. After death, the beneficiary need only record the death certificate and file the appropriate form with the local county assessor to transfer ownership of the property.
What are the Advantages of a Lady Bird Deed?
Married couples are protected from creditors while both are living. At the time of execution of a Lady Bird deed, it is not subject to federal gift tax, or subject to penalty for Medicaid eligibility purposes as it is not considered a gift for federal tax purposes. Also, at the death of the owner, the property receives a “step-up in basis” which is beneficial for income tax purposes to avoid capital gain taxes.
Lady Bird Deeds are also helpful with Medicaid planning. During the process of applying for Medicaid, any transfers made during the preceding five years are looked at by the Medicaid administration. If property was transferred during a period of five years, the property value is used to create a penalty period during which time the applicant may be disqualified for full Medicaid benefits. A transfer to a Lady Bird Deed is not considered for the purposes of calculating the penalty period. The original owner of a Lady Bird Deed still retains the right to use the property but it should not affect the ability for Medicaid qualification.
A Lady Bird deed helps preserve the residence as an exempt asset under Medicaid eligibility rules and avoids a Medicaid estate recovery lien. But, if a nursing home stay is required for the owner of the Lady Bird Deed, the resident’s income must be used to pay his or her care costs, so that income is not available for upkeep and maintenance expenses of the property. The beneficiary(ies) must find another way to cover these expenses during the nursing home stay.
What Are The Limitations of a Lady Bird Deed?
There are some situations where the use of a Lady Bird Deed is not recommended. It is not recommended if there will be a sizable unpaid lien on the property. Also, it may not be recommended if an owner wishes to name multiple (more than 2 or 3) beneficiaries, particularly if there is animosity among the beneficiaries. This is because the beneficiaries will have to work together to sell or dispose of the property following the death of the owner and disagreements could lead to a lawsuit.
A Lady Bird Deed is not as flexible as a trust. If multiple beneficiaries are named in a Lady Bird Deed, one beneficiary cannot sell the property following the owner’s death unless the others give their power of attorney.
This advice is for informational purposes only and is not intended and should not be used for the purpose of avoiding penalties under the Internal Revenue Code or recommending to any other person or party. Taxpayers should seek professional tax advice for their own tax circumstances.
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