A lady bird deed is a special kind of property deed that allows a real property owner to retain use and control over a property during their life and names one or more people, trusts, or organizations to inherit the property after the original owner dies. This group of inheritors are called remaindermen or remainder beneficiaries. The lady bird deed accomplishes the same objective as a Pay-on-death designation. This enhanced deed is recognized in five states: Florida, Michigan, Texas, Vermont, and West Virginia.
How does it work?
A lady bird deed works by allowing the real estate to be transferred to themselves for their lifetime which creates a life estate for the owner. Upon the owner’s death, the real estate passes outside probate to whomever the owner chooses.
A lady bird deed can be used as a probate avoidance tool. When the property owner passes away, it never becomes part of the estate of the deceased. The property passes to whoever is listed on the deed as a remainderman.
The Lady Bird Deed also provides the original owner broad control over the property during life. This includes the right to sell, rent, remove, or replace the remainderman.
This deed may be a worthy strategy to discuss with your elder care lawyer when discussing Medicaid planning.
There are also several tax advantages. A lady bird deed is an incomplete gift for tax purposes because of the control retained by the original owner/life tenant. The tax advantage is there is no need to file a gift tax return or pay any gift tax on the transfer.
For tax purposes the property is included in the decedent’s estate and the remainder beneficiaries inherit the property which allows the assets to be stepped-up as of the date of death and eliminates any appreciation that may have accrued while the property was owned by the decedent. Since the appreciation is not taxed, the remainder beneficiaries will pay less income taxes if they sell the property.
Although the deed allows the property owner to sell, rent, and change the remainderman, not all title insurance companies will honor this request and may require remainderman to sign off on any real estate transfers to avoid any potential legal issues. If a title insurance company (which are private businesses) will not insure title, then the deed will create costly title issues that require corrective legal action.
It is important to note, this Deed cannot be used to intentionally (or unintentionally) transfer their home to a 3rd party when a spouse or minor child remains lives in the property. The homestead cannot go elsewhere regardless of what is written in the Lady Bird Deed.
Lastly, although the lady bird and may include state-specific requirements and should be discussed and drafted by an elder care attorney. First State Trust Company partners with many law firms and financial planning consultants who can assist with this topic and many more. For additional information or help finding the partner that is right for you, please feel free to contact me directly at firstname.lastname@example.org.
Donna Baudanza, FSTC Relationship Manager
The posts expressed are views of FSTC and are not intended as advice or recommendations. FSTC does not offer tax or legal advice, professional counsel should be sought for tax or legal advice. For informational purposes only.