A lady bird deed is a popular name for an Enhanced Life Estate Deed. It’s a deed that allows the owner to automatically transfer property to a third person (called remainderman) upon the owner’s death without need of probate, while retaining with the owner the property’s possession, enjoyment, and control during his lifetime and without giving the remainderman any veto power or other decision-making ability over the property. Thus, the owner can mortgage or sell the property without the consent of the remainderman. If the owner sells the property during his/her lifetime, the lady bird Deed is considered revoked.
Lady bird deeds are only recognized in five states: Florida, Texas, Michigan, Vermont, and West Virginia.
Lady Bird Deed vs. Other Deeds
There are two similar deeds to lady bird deeds: the transfer on death deeds and life estate deeds.
The traditional life estate deed is similar to the lady bird deed in that, the owner legally transfers property to a third party (also called “beneficiary”) upon the owner’s death, with the owner (also called “life tenant”) reserving upon him/herself the right to use and enjoy the property during his/her lifetime (called “life estate”). It is different from the lady bird deed in that, once a traditional life estate deed is made, the owner or life tenant cannot sell or mortgage the property without the beneficiary’s consent.
A transfer on death (TOD) deed is similar to a lady bird deed in that, both deeds transfer property to a third person upon the owner’s death without need of going through probate. In both deeds, the owner reserves a life estate upon the property and can sell or terminate the interest of the beneficiary at any time prior to death. The main differences are that: (a) the TOD deed does not offer warranties; (b) the property subject of the TOD deed is subject to claims against the owner’s estate for two years after the owner’s death; (c) the TOD Deed can only be signed by the owner with legal and mental capacity, and not by a power of attorney; and (d) the beneficiary must survive the owner by 120 hours or the property passes through the owner’s estate.
Because the lady bird deed can be signed by a third person using a power of attorney, it is useful for Medicaid. A transfer on death deed can only be signed by the person with legal and mental capacity. If the owner is in his twilight years with diminished mental capacity, his capacity to sign a transfer on death deed may be questioned. In contrast, any third party with a power of attorney can sign a lady bird deed on behalf of the owner which is important in Medicaid planning.
Benefits of a Lady Bird Deed
The lady bird deed offers the following benefits: (a) probate avoidance; (b) retained control; (c) Medicaid planning; (d) federal tax planning; and (e) retained homestead exemption.
Because the property is automatically transferred to the remainderman upon the life tenant’s death, the property is not considered to belong to the estate and does not need to go through probate. The lady bird deed, in avoiding probate, saves on legal fees (especially if the only property of the owner is the property in the lady bird deed) and protects the property from the owner’s creditors, which includes the government seeking recovery or reimbursement for Medicaid expenses.
Thus, unlike the transfer on death deed which makes the property still subject to the owner’s estate claims within two years from death, the lady bird deed legally avoids creditors’ claims.
Unlike the life estate deed, the owner retains control over the property subject of the lady bird deed. The owner can sell or mortgage the property without the consent of the remainderman, as opposed to the life estate deed where the beneficiary’s consent is required before the owner can sell or mortgage the property. However, if the remainderman predeceases the owner, the remainderman’s estate may file a claim or interest over the property.
Because of the lady bird deed’s retained control feature, gift taxes are not imposed upon the deed’s execution. Because the remainderman’s interest is merely contingent and not ensured, the gift is not complete and no gift taxes are due. In a life estate deed, however, the gift is complete because the owner cannot sell or mortgage the property without the beneficiary’s consent. For this reason, gift taxes are due.
Medicaid generally has a lookback rule of 60 months, where the government evaluates all asset transfers of a Medicaid applicant for 60 months or 5 years prior to the application (30 months in California). If one gives away assets during this lookback period, he/she may be ineligible for Medicaid benefits for a particular period.
One may try to give assets before applying for Medicaid benefits for two reasons: (a) to be eligible for Medicaid; and (b) to prevent the government from filing a claim over the property for recovery and reimbursement of Medicaid expenses upon the owner’s death.
Because of the retained control feature, a lady bird deed is not considered a gift until the owner dies. Thus, a lady bird deed is not considered an asset transfer for purposes of the lookback rule in Medicaid applications. The property is still considered the owner’s, and will be computed as part of its assets, unless the property is exempted. If the property is exempted such as the primary home, an execution of the lady bird deed within 5 years prior to Medicaid application does not make the Medicaid applicant ineligible for benefits for a period of time.
A lady bird deed normally covers the primary home of the owner. As the primary home, it is normally excluded (depending on state and amount) from the computation of assets in determining Medicaid eligibility. The reason for a transfer using lady bird deed is normally to avoid Medicaid recovery, and not for Medicaid eligibility. The lady bird deed over one’s primary home in states that recognize it is useful so an owner can legally avoid the government’s claim on the property for recovery or reimbursement of Medicaid expenses.
If you seek to be eligible for Medicaid, there are other ways to accomplish this purpose. It is best to consult with an experienced estates and trusts lawyer to aid you in identifying the options available.
Federal Tax Planning
As previously mentioned, the lady bird deed avoids gift tax at the time of its execution because the gift is not yet complete until the owner’s death and can still be revoked in the owner’s lifetime.
For this reason, even if the property is not part of the probate proceedings and not subject to creditor’s claims, the property is still included in the deceased owner’s estate tax return for estate tax payment purposes. Thus, when the remainderman acquires the property, it acquires it with a stepped up basis which is not the acquisition cost of the owner but the fair market value at the time of transfer (at the time of the owner’s death). When the remainderman decides to sell the property in the future, its basis will be the stepped up basis and not the acquisition cost of the owner. The higher adjusted basis based on fair market value will save the remainderman from higher income or capital gains taxes.
Retained Homestead Exemption
Because of the retained control feature of lady bird deeds, the owner retains the favorable status of the property when it is used as the owner’s principal residence (homestead). As a homestead property, it qualifies for lower tax assessment. These benefits remain in place, despite the execution of a lady bird deed.
Lady Bird Deed Limitations
The lady bird deed is not advisable when there is a remaining mortgage on the property (a high unpaid mortgage) or the property is left to two or more remaindermen. When the property is left to two or more remainderman, their unanimous consent is required in dealing with the property. If they don’t agree, they might go to court. When there is a remaining mortgage on the property and it is left to a third party, the bank may raise the “due on sale” clause which makes the entire mortgage payable upon transfer. This will cause undue hardship to the remainderman.
A lady bird deed is only recognizable in five states. If you are in a state that doesn’t recognize a lady bird deed, there are still several documents available to help one achieve his/her purpose, whether it is Medicaid planning, Medicaid eligibility, or flexibility towards the transfer of property to the heirs. It is always best to consult with an experienced trust and estates lawyer to help you draft the necessary documents to achieve your purpose.
Should you need any assistance, we, at the Law Offices of Albert Goodwin, are here for you. You can call us at 718-509-9774 or send us an email at firstname.lastname@example.org.