If you’re looking to transfer real estate property to a beneficiary when you die, a Lady Bird deed might do the trick. This powerful estate planning instrument is a popular choice among Florida homeowners. This state laws aims to safeguard properties from Medicaid estate recovery and circumvent probate. Let’s breakdown how a lady bird deed works, and compare the benefits and drawbacks.
A financial advisor could help you create an estate plan to protect your assets.
What Is a Lady Bird Deed?
The Lady Bird deed, or enhanced life estate deed, is a special legal document providing a property owner with complete control over their property until passing. The property then gets transferred to the predetermined beneficiaries, sidestepping the often lengthy and expensive probate process.
This can be a strategic way to ensure that your real estate property remains in your possession until you die as it provides you with a life estate in the property, meaning you can live there until you die.
The deed first became available in Texas and was named after Lady Bird Johnson, wife of President Lyndon B. Johnson. The First Lady herself never used this estate planning strategy. Instead, her husband used the tool to pass the property on to her.
Today, Lady Bird deeds are commonly used in estate planning to effectively bypass probate and plan for Medicaid in the state of Florida.
Benefits of a Lady Bird Deed
A Lady Bird deed, also known as an enhanced life estate deed, offers several benefits. Here are five key advantages for estate planning:
- Avoid of probate: Upon the property owner’s death, a Lady Bird deed allows the property to pass directly to the named beneficiaries without undergoing the probate process. This saves time and money for the beneficiaries by bypassing the potentially lengthy and costly probate proceedings.
- Retain control and flexibility: The property owner retains control and can sell, mortgage, or alter the property during their lifetime without needing permission from the named beneficiaries. This flexibility distinguishes it from traditional life estate deeds, providing more autonomy over the property.
- Plan for Medicaid: Because the deed allows the property to bypass probate, it might not be considered a countable asset for Medicaid eligibility purposes. This could potentially help in qualifying for Medicaid benefits while preserving the property for heirs.
- Minimize capital gains taxes: Upon the property owner’s death, the property’s value for tax purposes can receive a “stepped-up basis” to its fair market value. This means that if the property is sold shortly after the owner’s passing, the capital gains tax may be reduced, as the basis for calculating gains will be reset to the property’s value at the time of the owner’s death.
- Protect your property from creditors: Florida law has certain provisions that protect a person’s primary residence from being taken by creditors in certain situations. Florida’s homestead exemption laws also offer significant protection for primary residences from creditors, which includes protection against forced sale to satisfy debts in many cases. However, the effectiveness of a Lady Bird deed in protecting property against creditors might be subject to legal interpretation and specific circumstances.
How Does the Lady Bird Deed Work in Florida?
The Lady Bird Deed works in Florida like it would in any other state that recognizes the estate planning tool.
When you execute the deed in Florida, you receive a life estate in the property, meaning you can live there until your death. Then, upon your death, the property immediately passes to your beneficiaries without having to go through the probate process.
Putting a Lady Bird deed to work in Florida involves preparing the deed, signing it in front of two witnesses and a notary, and then recording it in the public records of the county where the property is located.
Requirements for Lady Bird Deeds in Florida
Florida specifies a list of legal requirements for a Lady Bird deed. These include:
- A legal property description
- Identification of the life tenant and remainder beneficiaries
- A clause reinforcing the life tenant’s power to sell, convey or mortgage the property
Take note: Floridians should keep an eye on potential tax implications and the effect on eligibility for Medicaid or other public benefits.
Additionally, you must execute and record the deed according to the rules of your county.
Disadvantages of Using Lady Bird Deeds
While Lady Bird deeds offer several advantages in estate planning, they could also have drawbacks in Florida. Here are four to keep in mind:
- Potential Medicaid recovery: While Lady Bird deeds can aid in Medicaid planning by allowing the property to pass outside of probate and potentially not count as a Medicaid asset, some states, including Florida, have provisions for Medicaid estate recovery. After the property owner’s death, the state may seek to recover Medicaid benefits paid out during the owner’s lifetime from the property passed via the Lady Bird Deed. This could affect the inheritance left for beneficiaries.
- Complexity and legal considerations: Lady Bird deeds have nuanced legal requirements and may not be recognized uniformly across all states. In Florida, specific legal nuances and requirements must be met for the deed to be valid and effective. Creating and executing these deeds without proper legal counsel could lead to errors, rendering the deed invalid or causing unintended consequences for the property’s transfer.
- Potential title issues: While designed to avoid probate, Lady Bird deeds might create complications with the property’s title. There’s a possibility that title insurance companies or future buyers might be hesitant to accept or trust the validity of a Lady Bird deed, and this could cause challenges in property transactions or sales.
- Uncertain future legal interpretation: The legal enforceability and interpretation of Lady Bird deeds may be subject to change. Legislation, court rulings, or challenges could alter how these deeds are viewed and implemented in the future, potentially affecting their effectiveness or validity in estate planning.
Lady Bird deeds can help you avoid probate, retain control over property and gain protection from creditors. Nonetheless, you should also note potential drawbacks that could subject your property to Medicaid recovery, title issues and future legal interpretations. And you may also consider other common alternatives, including wills, living trusts, joint tenancy with rights of survivorship and durable power of attorney.
Tips for Estate Planning
- A financial advisor can be a huge help in protecting your assets and making sure your long-term estate planning has thought of everything you need for your own unique situation. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- A great way to get your estate plan off the ground is to follow this checklist, but you still might want to make sure you work with an advisor if your estate is complicated or sizable at all.
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