What the heck is a "Lady Bird Deed" (aka: Enhanced Life Estate Deed or Transfer on Death Deed)
Also known as a "Transfer on Death Deed" it is a reference used to describe an Enhanced Life Estate Deed. The term came into use when former President Lyndon B. Johnson used an enhanced life estate deed to transfer some property to his wife, "Lady Bird Johnson." An enhanced life estate deed can be used like a Warranty Deed or a Quit Claim Deed but with added benefits to the transferor.
Estate Planning to Manage & Protect Your Assets
What is an Enhanced Life Estate Deed?
It is a document that is primarily used to avoid the probate of real estate. It can also be used to transfer other assets like tangible personal property such as athletic equipment, furniture, home decorations, etc. Other valuable aspects of a transfer on death deed is that a person can reserve a life estate for themselves in the property coupled with the authority to sell the property or commit waste at anytime without permission of the named default beneficiaries.
If the person creating the deed does not sell the property during his or her lifetime, the home will pass directly to the named beneficiaries after the death of the grantor(s). The real estate avoids going through probate just like any other deed that conveys ownership of real estate to another person without the danger of triggering adverse consequences.
An added value of using an enhanced life estate deed is that the execution of such a deed is not considered a transfer of ownership for purposes of applying for Medicaid benefits. In February of 2006, the government passed the Deficit Reduction Act that changed many of the rules Medicaid uses for determining when a patient/applicant can begin receiving benefits for services such as nursing home care.
Under the current law, the state will "look back" five (5) years from the time a patient applies for Medicaid benefits. Prior to February 2006, the look back period was three (3) years and was from the time that a patient disposed of valuable property gratis or at a much reduced sale.
Therefore, if a patient transferred his or her home to children to avoid probate and remove the home from countable assets, the government will look back five years to see if the transfer took place in that time frame. If it did, then the patient will have to wait a penalty period before he or she is eligible to receive benefits. This penalty period can be devastating if the patient does not have any other assets to carry them through the penalty period.
Another desirable feature of the lady bird deed is that the property will not be subject to the creditors of the named beneficiaries. If a beneficiary has government tax liens, judgments against them or other encumbrances, their problems do not become attached to the grantor's real estate. In addition, if it appears the liens will still be present after the death of the grantor, the grantor, during life, can remove the troubled beneficiary from the deed and substitute another beneficiary to take the property at the grantor's death.
When a lady bird deed is used in the manner of a warranty deed, the grantor is giving the beneficiary a warranty that A) the grantor has clear lawful title to the property, B) the grantor has the right to convey the property, C) the grantor assures the quiet possession of the property (meaning there is no dispute over ownership) D) the property is free of any leins or encumbrances not of record E) grantor will defend the title to the property against any lawful claim.
Compare this to a quit claim deed that does not provide any of the above warranties. All a quit claim deed can do is allow a grantor to give up any right he or she may have in the subject real estate. Further, a quit claim deed gives a present ownership interest in the grantor's property and this can cause problems later if the grantor needs to sell his or her home and the joint owner refuses to sell.
This is why it is highly recommended that people do not use quit claim deeds to transfer real estate to other persons to avoid probate. This is not the case if a quit claim deed is used to transfer property to a revocable living trust. However, even transfer to a revocable trust may not be desirable due to the fact that creditors may be able to reach real estate in a revocable trust.
It is important to remember that real estate owned by a husband and wife is held as "tenants in the entirety." This form of property ownership is immune to collection by creditors if one of the spouses is not a party to a loan or debt incurred by the other spouse alone. If the real estate is transferred to the trust by a quit claim deed, this could destroy the ownership of the property as tenants in the entirety and open it up to collection efforts by creditors.
Use of a Lady Bird Deed allows the tenancy in the entirety to continue and execution of the deed does not transfer the real estate. The real property is transferred upon the death of the survivor if the property is not sold or transferred by the grantor(s) during life. In addition, because the beneficiaries do not take ownership of the property until the death of the grantor(s), it is not considered a gift for federal gift tax purposes. Also, the beneficiaries take the property at a stepped up cost basis when they take ownership at the grantor(s) death. This benefits the beneficiaries by greatly reducing or eliminating any capital gains tax that must be paid on the income produced by the sale of the home.
Property taxes are also held in check by use of a Lady Bird Deed. In most other cases, if a property is transferred to another person by warranty deed or quit claim deed, it "uncaps" the property taxes on the real estate. The law requires a filing of a Property Transfer Affidavit with the township assessor's office when property is transferred and this allows the local government to reassess the property and increase the taxes based on the property's current value.
A Lady Bird Deed does not transfer the property at execution of the deed rather, it creates a power of appointment in the grantor(s) and provides for a gift in default to the default beneficiaries named in the deed. It is the death of the grantor(s) and not the creation of the Lady Bird Deed, that signals the transfer of property to the named beneficiaries.
Once the property is transferred to the beneficiaries by the death of the grantor(s), only then must a Property Transfer Affidavit be filed within 45 days after the grantor(s) death with the local tax assessor's office. At this time the beneficiaries should obtain a current appraisal and determine what their stepped up cost basis is in the property. The beneficiaries can now sell the home and minimize or eliminate capital gains tax.
In conclusion, an Enhanced Life Estate Deed (Lady Bird Deed) can be a very useful tool in estate planning in certain circumstances. If a particular person's situation does not require the complexity of a trust or even a will, then a lady bird deed could be used to transfer a home to a beneficiary while at the same time maintaining ownership of the property should it later be required for the grantor's financial needs. The lady bird deed eliminates the fear a person may have in giving up ownership and control over their own property just to avoid "the government getting it."
Disclaimer: The information contained herein is not comprehensive and should not be construed as legal advice. Further, reliance on any information contained in this website does not constitute the formation of an attorney/client relationship. The law discussed herein is complex and constantly changing. You should seek the assistance of an experienced attorney for specific legal advice regarding your particular circumstances.
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