Life estates are ways for you to transfer property to another party while retaining the right to live there until you pass away, or some other event occurs. As the grantor of the life estate deed, you become a life tenant of the property.
What Is a Lady Bird Deed?
Lady Bird Deeds, technically known as enhanced life estate deeds, are life estates for which the grantor retains much greater control over the property. If you are a property holder, you may use a Lady Bird Deed to transfer real property to a specific beneficiary while retaining certain rights to the property. These rights include selling your interest, mortgaging the property, and applying for property tax exemptions. Upon your death, these rights end, and the beneficiary you've named solely takes control of the property without court involvement.
There are, however, only a few states that allow this arrangement – Florida, Texas, Michigan, Vermont, and West Virginia.
6 Reasons to Set Up a Lady Bird Deed
So why might someone consider a Lady Bird Deed, if permitted by state law?
- First and foremost for many is the desire to avoid a court making decisions about the property as well as the costs of having to go to court.
- It may also allow your heirs to expedite any probate process that remains for the rest of your assets; this is because with a large asset like your home out of the probate picture, your estate may qualify for an expedited process.
- Perhaps you own properties in multiple states. Instead of having to deal with several state courts, you may be able to simplify things for your loved ones with this type of deed, at least in one state.
- A Lady Bird Deed can reduce disputes between your heirs. When an asset is deeded to a specific beneficiary and does not pass through probate, an inheritance dispute can be avoided if the deed is drafted and executed correctly. If a grantor changes their mind later, they may also be able to void or cancel the deed.
- If your state permits a Lady Bird Deed, you still retain a great deal of control over the real estate while you are alive.
- A Lady Bird Deed offers tax advantages similar to the "step-up" your heirs would receive if the property was passed to them through probate.
The beneficiary of a Lady Bird Deed also receives a "step-up" in basis. Therefore, any tax liabilities arising from the sale of the property will be determined by the value of the property at the time you became the owner, not the grantor. In many cases, this saves the beneficiary a significant amount of capital gains tax. However, the property may still be included in your estate tax calculation.
Are There Any Downsides to Lady Bird Deeds?
Lady Bird Deeds do have a few potential drawbacks. One of the biggest disadvantages of this arrangement is that it does not protect the property from the creditors or a divorce of the grantor.
Additionally, in some states, this type of life estate deed can create issues if the grantor wishes to qualify for Medicaid, specifically with restrictions against transfers of property within a specified look back period.
A person's rights are still restricted while the Lady Bird Deed is in effect even though they have “enhanced” rights over a regular life estate. Property decisions can still be influenced by the deeded beneficiary, who still has an interest in the property. Beneficiaries may have the right to sue the grantor in some cases – for instance, if the grantor does not take care of the property or fails to pay property taxes.
Connect With Your Estate Planning Attorney
If you are interested in an enhanced life estate deed and an alternative way to transfer property to loved ones, speak to your estate planning attorney.