What Is a Lady Bird Deed?
A Lady Bird deed is a particular type of life estate deed used for estate planning. This article explains how a Lady Bird deed works. It also discusses the advantages and disadvantages of using this type of deed to transfer real estate.
Lady Bird deeds are only available in a handful of U.S. states. It is an "enhanced life estate deed" compared with a “traditional life estate deed" because the life estate holder (the owner) controls the property. This means the owner can sell or lease the property during their life.
A life estate is the right to live on a property for the remainder of the life estate holder's life. Once the life estate holder dies, the property reverts to another person named on the deed. However, people with a life estate do not have control over the property.
What Does a Lady Bird Deed Do?
A Lady Bird deed allows a property owner (the grantor) to convey a life estate in a property to themselves or another person. The grantor can name someone to whom the property will revert once the life estate holder dies. The property does not have to go through probate, saving money and time. Any process that can reduce or eliminate the probate process is worth exploring.
For example, a mother may want to leave her son real property. Suppose she wants to structure a property transfer to leave her son her primary residence. But she wants to limit his ownership interest. She does not want her son to have her home right now.
In this case, the mother would transfer the property as a life estate. The mother would own the real property with her as the life estate tenant and the son as the remainderman. The mother retains control over the property until she dies. At that point, the property reverts to the son as the property owner. The remainderman's ownership interest gives them complete control over the property after the grantor's death.
A Lady Bird deed has many advantages as a specialized estate planning tool. It can transfer real estate to a beneficiary upon death and also:
- Allows the owner of a primary residence to enjoy life tenancy
- Protects the property from creditors while both members of a couple are alive
- Transfers property to loved ones while avoiding probate
- It avoids federal gift taxes on the transfer of property
- Maintains eligibility for Medicaid
- Prevents property from being sold after death to repay Medicaid
Again, unlike a traditional life estate deed, an “enhanced" life estate deed does not restrict the current owner's use of the property. The original owner retains complete control over the property. Using a Lady Bird deed, the homeowner retains control over their property until they sell it, gift it, or die. The remainder beneficiary receives the property if the grantor owns the property at the owner's death.
Why Is It Called a Lady Bird Deed?
The Lady Bird Deed originated with Florida attorney Jerome Ira Solkoff. He wrote about this type of deed in his estate planning book. He used former President Lyndon B. Johnson and Lady Bird Johnson's names to illustrate his example. The name stuck, and Lady Bird deeds have become a nickname for these enhanced life estate deeds.
What States Recognize a Lady Bird Deed?
A Lady Bird deed is only recognized in the following U.S. states:
- West Virginia
How Do You Create a Lady Bird Deed?
The mechanics of creating a Lady Bird deed vary depending on the state. Working with an experienced attorney who understands your state's laws and can help you find the most effective approach for your unique situation.
For example, in some states, a property owner may change their deed to name a default beneficiary, ultimately making the deed a transfer on death deed (TODD). To take possession of the property — which must be a primary residence — the beneficiary records the death certificate and files a Property Transfer Affidavit with a local assessor's office.
Typically, homeowners name themselves on the Lady Bird deed as the life estate owner, a life tenant. They name a remainderman as the beneficiary to take the property upon their death.
You can usually name more than one beneficiary to a Lady Bird deed. For example, if a homeowner had three children, they could name all three as remainder beneficiaries.
When the Lady Bird deed and the power of attorney meet statutory requirements, a power of attorney may be used to execute a Lady Bird deed.
How Do You Remove a Beneficiary from a Lady Bird Deed?
To revoke a Lady Bird deed, the owner must draft and sign a new deed. The new deed can reference the prior deed and explicitly state that the grantor is executed for the purpose of removing a remainder beneficiary.
What Are the Benefits of a Lady Bird Deed?
- One of the most significant advantages of a Lady Bird deed is cost savings. A property owner can use a Lady Bird deed to transfer a primary residence to beneficiaries outside of probate.
- For example, Michigan law offers creditor protection from the death of a spouse if the Lady Bird deed lists both husband and wife on the deed.
- Property transfer through a Lady Bird deed is not subject to federal gift tax or estate tax by the IRS.
- In some states, such as Florida, the real property maintains its homestead exemption for tax purposes; taxes will not increase due to the change of ownership in the deed.
- Adding a beneficiary using a Lady Bird deed is not considered a divestment for Medicaid eligibility purposes, so it's not subject to penalties. This type of deed allows you to transfer property rights but maintain complete control over the property.
- When the property transfers after the owner's death, it is not subject to capital gains tax because it transfers at the current fair market value. It receives a step-up in basis upon the owner's death.
But Lady Bird deeds may operate differently from state to state. So, it's crucial to get legal advice. Discussing the type of deed with an estate planning attorney will help you understand how it operates in your state.
Lady Bird Deed and Long-Term Care
Long-term care is expensive. If someone is living in a nursing home and Medicaid pays for their stay, Medicaid will try to recover its expenses with assets from the person's probate estate after death. A home can be one of those assets. (There is no estate recovery in the federal Medicare program, only at the state level for Medicaid, and that may vary by state.)
In Michigan, a Lady Bird deed makes the residence an exempt asset for obtaining Medicaid benefits, and it avoids a Medicaid estate recovery lien after the owner's death. These rules can change with time.
Families who are doing Medicaid planning for future nursing home care for a Medicaid recipient should consult an elder law attorney. Get legal advice on asset protection strategies so your loved one doesn't run afoul of eligibility rules and look-back periods.
What are the Disadvantages of a Lady Bird Deed?
There are some distinct disadvantages to using a Lady Bird deed:
- This is an unfamiliar type of deed, and some title insurance companies have problems understanding how to handle them.
- Large financial institutions have refused to offer a loan or line of credit against a property with a Lady Bird deed.
- A Lady Bird deed is less flexible than a revocable living trust (but also less expensive).
- If you have more than one named beneficiary, they must work together. Disagreements about keeping or selling the property could wind up in court.
- In Michigan, if the default beneficiary named in the Lady Bird deed is not a close relative, a property tax cap doesn't apply upon the donor's death. If the property has appreciated considerably over time, that could be significant.
Questions? Talk to an Estate Planning Lawyer
If you live in Florida, Michigan, Texas, Vermont, or West Virginia and want to take advantage of a Lady Bird deed, get legal advice from a knowledgeable elder law or estate planning attorney. The specifics of this estate planning product can vary from state to state. Be sure it achieves your desired goals before you change your property deed.
Can I Solve This on My Own or Do I Need an Attorney?
- DIY is possible in some simple cases
- Complex estate planning situations usually require a lawyer
- A lawyer can reduce the chances of a family dispute
- You can always have an attorney review your forms
Get tailored advice and ask your legal questions. Many attorneys offer free consultations.