A lady bird deed, also known as an “enhanced life estate deed”, is a special type of life estate deed that gives the owner extended control over the property until they become deceased.
Once the owner dies, the property is then automatically transferred to the new owners without having to go through the probate process.
How Do Lady Bird Deeds Work?
Similar to regular life estate deeds, lady bird deeds work by dividing ownership of real estate into different time periods. When a person forms a lady bird deed, they are essentially transferring property to themselves for their lifetime. This action creates a life estate in the original owner who is referred to as the “life tenant.”
Lady bird deeds also name one or more individuals and/or entities who will inherit the property after the original owner dies. These inheritors are called the “remainder beneficiaries.”
With a lady bird deed, the original owner (i.e., the life tenant) can change their mind without involving the remainder beneficiaries. For instance, if the original owner wants to sell or mortgage the property, or gift it to someone else, they can do so without the permission or involvement of the remainder beneficiaries.
If the owner does not change their mind, then the property will automatically pass to the remainder beneficiaries after the owner’s death. Again, there is no need to probate the deceased individual’s estate simply to transfer title to the property in these situations.
Where Can You Get a Lady Bird Deed?
Lady bird deeds are currently only available in five states, which includes: Florida, Texas, Michigan, Vermont, and West Virginia.
Additionally, each one of these states has its own requirements for creating a valid lady bird deed, such as the special language required to form these deeds.
What are the Benefits of Lady Bird Deeds?
There are certain characteristics that lady bird deeds have, which makes them a valuable tool when it comes to estate planning. Some of these benefits include:
- Retained Control: Lady bird deeds permit an owner to change their mind about the property. They do not have any responsibilities to the remainder beneficiaries, which means the owner does not have to involve the beneficiaries in any decisions they make about the property. Also, so long as the original owner is still alive, the remainder beneficiaries will not have any decision-making authority over the property.
- Medicaid Process: When someone applies for Medicaid, whichever department administers Medicaid in their state will review any transfers that were made in the past five years prior to their application. If an individual transferred property during this five-year period, the value of this property will be used to create a penalty period in which the applicant may not qualify for full Medicaid benefits.
- However, lady bird deeds are not considered a transfer because the original owner retains the right to use the property. Therefore, lady bird deeds generally will not have an impact on an individual’s ability to qualify for Medicaid benefits.
- Probate Avoidance: Probate is a court-supervised legal proceeding for transferring the property of a deceased owner in accordance with their valid will. Lady bird deeds avoid the probate process by automatically transferring the property after the owner dies. This action removes the property from the probate estate and also takes the property out of the hands of the probate court. In other words, the probate court will no longer have jurisdiction over the property.
- Federal Tax Planning: For tax purposes, a lady bird deed is considered to be an incomplete gift because the original owner retains control of the property. Since this is the case, there is no need to file a gift tax return or pay any form of gift tax on the property transfer. Instead, after the owner dies, the property is included in the deceased individual’s estate taxes.
- The remainder beneficiaries are then treated as if they inherited the property. This allows the property to qualify for a stepped-up basis. This basis is beneficial because it erases any appreciation that might have accrued while the deceased owner held title. Under this basis, any accrued appreciation will not be taxed and as such, the remainder beneficiaries will pay less income taxes if or when they sell the property.
- Reduces Legal Fees: Many of the advantages that lady bird deeds offer can also be achieved by setting up a living trust. However, a living trust needs to be created and in order to do so it requires forming a separate deed to transfer the property into that trust. This two-step process typically involves the use of an attorney. Also, it is almost always more expensive as compared to the costs of preparing a lady bird deed.
Do I Need to Hire a Lawyer for Help with Lady Bird Deeds?
Lady bird deeds are highly specific documents, which are also governed by extremely specific state laws. Thus, if you are considering obtaining a lady bird deed, it would be beneficial to consult a local estate lawyer before proceeding.
An experienced estate lawyer will be able to determine whether a lady bird deed is suited to your needs, and if so, can help you draft and review any associated legal documents. A lawyer can also assist you with filing any lawsuits regarding a lady bird deed, or if you need to appear in court on a relevant matter.
Again, lady bird deeds are only available in a handful of states. Thus, you may want to contact a lawyer to find out if there have been any changes made to your state laws, or if there is another type of deed that may afford the same or similar benefits.