Lady Bird Deed

Other Names for Lady Bird Deeds

The technical name for a lady bird deed is enhanced life estate deed. The word “enhanced” distinguished lady bird deeds from regular (traditional) life estate deeds, which do not give the original owner/life tenant continued rights to deal with the property without the remainder beneficiaries’ involvement. Lady bird deeds are also called ladybird deeds (without the space between “lady” and “bird”).

Benefits of Lady Bird Deeds

Lady bird deeds have several features that make them popular estate planning tools.

Probate Avoidance. Probate is a court-supervised legal proceeding for transferring a deceased owner’s property to his or her heirs. Lady bird deeds avoid probate.

By transferring the property automatically at the deceased owner’s death, lady bird deeds remove the property from his or her probate estate. This removes the property from the jurisdiction of the probate court.

Although the remainder beneficiaries may want to record the deceased owner’s death certificate in the land records to show others that title has passed, there is no need for a court proceeding.

Retained Control. Lady bird deeds allow the original owner/life tenant to change his or her mind without responsibility to—or involvement of—the remainder beneficiaries. If the original owner/life tenant decides that she wants to sell the property or give it to someone else, she may do so. The remainder beneficiaries have no veto power or other decision-making ability while the original owner/life tenant is still alive.

Medicaid Planning. When a person applies for Medicaid, the office that administers Medicaid looks at any transfers made during the preceding five years. If a person transferred property during the five-year period, the value of that property is used to create a penalty period during which the applicant may not qualify for full Medicaid benefits.

Lady bird deeds are not considered a transfer for purposes of calculating the penalty period. Because the original owner/life tenant retains the right to use the property, the lady bird deed should not affect his or her ability to qualify for Medicaid.

Lady bird deeds can also help with Medicaid recovery. When a person receives Medicaid benefits, Federal law allows the state Medicaid agency to recover assets from the deceased person’s “estate” at his or her death. States differ in how they define “estate” for purposes of Medicaid recovery. Some states—like Michigan, Texas, and Florida—define “estate” to mean “probate estate.” In these states, lady bird deeds can avoid Medicaid recovery because they remove the property from the probate estate.

Federal Tax Planning. Because of the control retained by the original owner/life tenant, a lady bird deed is an incomplete gift for tax purposes. This has two tax benefits. First, there is no need to file a gift tax return or pay any gift tax on the transfer. Because tax law treats the original owner as still owning the property until death, it is as though the owner did not transfer the property during his or her lifetime.

Second, the property is included in the deceased owner’s estate for tax purposes when he or she dies. The remainder beneficiaries are treated as inheriting the property by virtue of the deceased owner’s death. This allows the property to qualify for stepped-up (or adjusted) basis. Stepped-up basis is beneficial because—for tax purposes—it erases any appreciation that may have accrued while the deceased owner held title. Because that appreciation is not taxed, the remainder beneficiaries will pay less income taxes if they sell the property.

Property Tax Planning. Some states—including Florida, Texas, and Michigan—cap the amount that the local taxing authority can increase the value of property to compute property taxes on a personal residence. As long as the cap is in place, the local taxing authority cannot exceed the increase specified in the cap, even if the property’s actual value exceeds the capped amount.

In areas where property value is increasing, the cap on increased property taxes provides a valuable benefit to the homeowner. This benefit is often lost when the homeowner transfers the property to a new owner. On the transfer, the local taxing authority can assess the property at its current market value, without regard to the cap.

Lady bird deeds can help avoid this problem. Because the transfer to the remainder beneficiaries does not happen until the owner’s death, the owner will not lose the benefit of the property cap on his or her home while he or she is still alive. This can prevent re-assessment of the property at its current market value and help save property taxes.

Retained Homestead Exemption. Many states provide favorable status to property that is used as a person’s principal residence (homestead). Homestead property often qualifies for lower tax assessment. It can also qualify for special creditor protections. When property is transferred by lady bird deed, these benefits should remain in place.

Saving Legal Fees. Many advantages described above can often be achieved using a living trust. This technique first requires the trust to be created. Once the trust is in place, a separate deed is needed to transfer property into the trust. This two-step process often requires an attorney and is always more expensive than the cost of preparing a lady bird deed.

The combination of these benefits often makes lady bird deeds a good choice in the states that recognize them.

Lady Bird Deeds and Warranty of Title

Deeds are often named the feature that defines them. Some deeds—like quitclaim deeds, special warranty deeds, and warranty deeds—are named after the warranty of title they provide. Others—like lady bird deeds, life estate deeds, and transfer-on-death deeds—are named after the probate avoidance feature.

The probate avoidance feature of a lady bird deed is independent of the warranty of title. Because the same deed can have different features, two names may correctly apply to the same deed. For example, a lady bird deed may also be a quitclaim deed.

Relationship to Last Will and Testament

A lady bird deed is a nonprobate transfer. Real estate transferred by lady bird deed passes outside of probate and does not become part of the probate estate. Because a will only controls assets that are part of the probate estate, and because property that passes by lady bird deed is not part of the probate estate, the terms of a person’s will are irrelevant to a lady bird deed. The property will pass to the remainder beneficiaries named in the lady bird deed regardless of what the will says and the personal representative named in the will has no authority over the property described in the lady bird deed.

Lady Bird Deeds and Title Insurance

Given the benefits of lady bird deeds, one may ask why they are only available in a handful of states. The answer has to do with title insurance. Title insurance is an essential part of most real estate transactions. If a title insurance company will not insure title, then the deed will create costly title issues that require corrective legal action.

Title insurance companies are private businesses. It is up to the company to decide whether it will issue a title policy. If the title company won’t insure title passed using a particular type of deed (like a lady bird deed), then that kind of deed should be avoided. It doesn’t matter if the deed is in the correct format for recording. It doesn’t matter if the parties agree to the terms of the deed. It doesn’t even matter if a statute authorizes the deed. If the deed does not transfer insurable title, it should not be used.

When we say that lady bird deeds are recognized in five states, we are saying that—as a general rule—title insurance companies in those five states will insure title that passes through lady bird deed. Other states will not. Although there’s nothing to prevent someone in a state that does not recognize lady bird deeds from creating one, the deed may result in an uninsurable title that reduces the value of the property or requires court proceedings to straighten out.

How to Create a Lady Bird Deed

Unlike transfer-on-death deeds, lady bird deeds depend on common law instead of statutory authorization. Attorneys developed lady bird deeds a practical tool to meet client needs. As stated above, the validity of a lady bird deed often depends on whether a title insurance company in the state where the property is located will recognize the deed as valid.

Each state that recognizes lady bird deeds has its own requirements for validity. These requirements include the special language to create the enhanced life estate. They also include the state-specific requirements for all deeds, such as:

• A correct legal description;
• A statement of consideration provided, if any;
• If multiple owners are involved, and a specification of the manner in which co-owners will hold title;
• Font size and page format requirements that meet the state’s recording laws;
• Any indexing instructions, tax parcel numbers, or other information required by state law; and
• Signature and notary acknowledgments that follow the state’s required format.

It is important to create a lady bird deed that meets all state requirements. Using a one-size-fits-all form or a form for another state can create unintended consequences.