In general, a deed is a legal document that can be used to transfer ownership rights in a home or other piece of property from the current owner to a new one. There are many different types of deeds, each of which has its own requirements. However, the majority of deeds contain the following elements:
- A description that identifies the specific property being transferred;
- The names of the parties involved in the deed transaction (i.e., the grantor and the grantee); and
- The signature of the party who is transferring the deed (i.e., the grantor), which must be notarized by a notary public.
Aside from transferring ownership rights in a home, deeds can also serve several other purposes, including to transfer gifts, trust contents, and/or certain rights (e.g., a tax deed) to other parties. A person should know why they want to make a deed before officially creating it because the reason will determine what type of deed they actually need.
A lady bird deed, also referred to as an “enhanced life estate deed”, is a special kind of life estate deed that gives a property owner extended control and rights over a property until their death. Once the property owner is deceased, the property in a lady bird deed is then automatically transferred to the new property owners without having to go through the probate process first. This can be very beneficial for both the property owner and their beneficiaries.
How Do Lady Bird Deeds Work?
As previously mentioned, the main purpose of the lady bird deeds is to retain control over property during an owner’s lifetime and to avoid probate upon their death. Basically, a lady bird deed operates similarly to a standard life estate deed in that it divides ownership of real property into separate time periods.
For instance, when a property owner forms a lady bird deed, they are essentially transferring property to themselves for the rest of their life. This transfer creates a life estate in the original owner of the property (i.e., the “life tenant”). A lady bird deed will also contain the names of one or more individuals and/or entities who will inherit the property after the “life tenant” becomes deceased. Such inheritors are known as the “remainder beneficiaries.”
One unique fact about lady bird deeds is that the life tenant (i.e., the original property owner) can change their mind about transferring the property without informing or asking the remainder beneficiaries. For example, if the life tenant wants to sell the property or gift it to another individual, the life tenant can do so without having to get permission from the remainder beneficiaries named in the lady bird deed document first.
On the other hand, if the life tenant does not change their mind at any point, then the property will automatically transfer to the remainder beneficiaries upon their death. Again, the beneficiaries will not have to wait for the property to pass through probate in order to receive title under the terms of a lady bird deed.
Another unique fact about a lady bird deed is that contrary to popular belief, it did not in fact receive its name from President Lyndon B. Johnson. Instead, a law professor in Texas who is credited with creating the deed in the 1980s used the Johnson’s name as part of an example to demonstrate how the deed worked in theory. Hence, how the lady bird deed or Lady Bird Johnson Law got its name.
One final thing to note about lady bird deeds is that they are sometimes called a lady bird trust. The two titles are used interchangeably and generally refer to the same type of legal document in this instance.
What States Allow Lady Bird Deeds?
As of April 2021, lady bird deeds are currently only available in five states. These states include the following:
- Vermont; and
- West Virginia.
In addition, it is important to note that each one of the five states mentioned in the above list will have its own separate requirements for forming a valid lady bird deed. For instance, each state has statutes that provide special language in order to create a valid lady bird deed. As such, if a lady deed does not contain the special language provided by state laws, then the deed will be considered to be invalid.
What Are the Benefits of Lady Bird Deeds?
As previously discussed, lady bird deeds contain special language and require certain characteristics to be met before they can be declared a valid lady bird deed. These necessary traits can make them a valuable tool when an individual needs to create a personal estate plan. Some advantages that a lady bird deed may offer to its creator include the following:
- Probate avoidance: Probate is generally defined as a court-supervised legal proceeding that involves the distribution of a deceased owner’s estate in a manner that comports with a valid will. Lady bird deeds are able to avoid the probate process since such deeds automatically transfer the property upon its owner’s death.
- This action not only extracts the property from the probate estate, but also removes the property from judicial oversight by the probate court. In other words, the probate court will no longer have proper jurisdiction over that property.
- Reduced legal fees: Most of the benefits associated with lady bird deeds can also be achieved by forming a living trust. Unlike a lady bird deed, however, a living trust must be created, meaning that it requires forming a separate deed document to be able to transfer the property into the trust.
- This extra step usually requires the assistance of an attorney. Thus, creating a living trust is almost always more expensive when compared to the cost of drafting or preparing a lady bird deed, which only requires a single step.
- Federal tax incentives: For federal tax purposes, a lady bird deed is deemed to be an incomplete gift since the original owner retains control of the property. For this reason, the owner is neither required to file a gift tax return nor pay any form of a gift tax on the transfer of property. Instead, the property will be included in the deceased owner’s individual estate taxes upon their death.
- The remainder beneficiaries are then treated as if they inherited the property (similar to a will), rather than as if they simply received it (like with other types of deeds). This enables the property to qualify for a “stepped-up” basis. A stepped-up basis is beneficial to the new owners because it erases any appreciated interests that may have accrued while the deceased owner held title to the property.
- Also, any accrued appreciation will not be taxed, so the remainder beneficiaries can expect to pay less on income taxes if or when they decide to sell the acquired property.
- Owner retains control: Unlike some deeds, lady bird deeds generally allow a property owner to change their mind about property transfers. Under a lady bird deed, the property owner does not owe any duties or legal obligations to the remainder beneficiaries, which means that the owner does not have to include their beneficiaries in any decisions they make regarding the property.
- Additionally, as long as the original property owner is still alive, the remainder beneficiaries will not have any decision-making rights over the property in question.
- Medicaid eligibility: When an individual applies for Medicaid, the department that is responsible for administering Medicaid in their state will also be in charge of reviewing any transfers of property that they made within the last five years prior to filing their application. Thus, if it is discovered that a Medicaid applicant transferred property within this five-year time frame, then the value of that property will be used to impose a penalty period in which the applicant may not be eligible to receive full benefits under Medicaid.
- This is when having a lady bird deed can be useful, because property included in a lady bird deed is not considered a transfer. This is because the original property owner will retain the right to use the property until their death. Accordingly, a lady bird deed normally will not have an effect on an applicant’s ability to qualify for full Medicaid benefits.
Can a Lady Bird Deed Be Contested?
As discussed above, the requirements and procedures associated with lady bird deeds will depend on the particular laws set out in one of the five states that recognizes these types of deeds. In general, however, issues or disputes over a lady bird deed will need to be contested by filing a lawsuit in civil court.
The parties would then need to follow the standard process of a lawsuit, such as proving their claims and providing supporting evidence. They would also need to wait for a judge to issue a decision. If a party is successful in bringing a lawsuit, they could receive monetary damages for their losses.
Additionally, parties who are contesting a lady bird deed should attempt to work out the issues amongst themselves. Otherwise, litigation could be costly and they may not receive the results they want.
One other option that could be used, but would need to be done before the creator of the lady bird deed died, is to assign a trustee to oversee the transfer of property.
Do I Need to Hire a Lawyer for Help with Lady Bird Deeds?
Lady bird deeds are extremely particular documents that are governed by highly specific state laws. As discussed above, lady bird deeds are not available in all states and thus an individual may need to execute a different type of deed to cover their property needs.
Therefore, if you are debating whether to create a lady bird deed, then it may be in your best interest to consult with a local estate lawyer beforehand who can perform research to check if such deeds are recognized by the laws in your state. If so, an experienced estate lawyer can discuss whether a lady bird deed is the appropriate legal document for your particular situation. They can also assist in drafting the deed as well as any other related documents.
Your lawyer can also assist you in resolving any issues or disputes you have over a lady bird deed and can help you file a lawsuit in court. In addition, if your case goes to trial, your lawyer will be able to provide legal representation in court as well.
Finally, a lawyer will also be able to apprise you of your rights under the laws of your state. They will also help make sure that you are aware of any updates or changes that have been made to those existing laws.