What is a lady bird deed?
A lady bird deed is a special type of life estate deed (an enhanced life estate deed) that allows you to transfer real estate to a beneficiary at your death without having to go through probate.
How does a lady bird deed work?
The property owner retains the right to occupy and use the property and can sell, mortgage, lease, or even rescind and make changes to the lady bird deed without permission from any of the beneficiaries. The property will automatically pass to the remainder beneficiaries if the property owner dies without revoking the lady bird deed.
Advantages of a Lady Bird Deed
You keep control. The lady bird deed allows the original owner to sell their property, rescind the lady bird deed, and make changes to the lady bird deed without any involvement from their beneficiary. Ultimately, while you are alive, the beneficiaries have no decision-making rights to the property.
You avoid probate with this asset. A lady bird deed automatically transfers a property to the designated beneficiary upon your death without your family having to go through the probate process.
No federal taxes are due when executed. A lady bird deed is considered an “incomplete” gift for tax purposes. Therefore, the property does not have any gift tax associated with it when a lady bird deed is executed. When you pass, the assets in the lady bird deed are included in your estate.
The house receives a stepped-up basis at your death. The value of the property is stepped up to the market value at the time of your death, which helps minimize tax consequences if and when your beneficiary sells the property.
You can keep property tax exemptions. You can continue to use your exemptions, such as homestead exemption and over 65 exemption, while you are alive.
It may help with Medicaid qualification. When a client applies for Medicaid, the Medicaid office will look at any property transfers that occurred within the previous five years. The value of anything transferred in this period is subject to penalty and may lead to a penalty period where a client is not eligible for Medicaid benefits. The property transferred through a lady bird deed does not need to be disclosed to Medicaid and cannot be used to determine a client’s eligibility.
Disadvantages of a Lady Bird Deed
It only avoids probate for real property. Any other assets you have must still be disposed of through a will, trust, or other instrument.
A lady bird deed does not establish guardianship. If a lady bird deed names a minor child as a remainder beneficiary and the child is still a minor at your death, a guardian will still need to be appointed for the child until they are no longer a minor.
A lady bird deed cannot specify what happens if a remainder beneficiary predeceases you. You can update the lady bird deed to change the remainder beneficiary while you are alive, though.
It may trigger a Due on Sale clause in a mortgage. If there is an outstanding mortgage on the property, and the beneficiary is someone other than a spouse or child, there is a chance that the mortgage company will claim that the conveyance triggered a Due on Sale clause. A Due on Sale clause allows the lender to declare the entire balance due immediately if the ownership of the property changes.
Hammond Law Firm, PLLC is able to advise on your estate planning needs or answer your estate planning questions. If there is something we can help with, please call us as 903-716-6668.