A ladybird deed, also referred to as an enhanced life estate, allows for the transfer of property to someone else while retaining control of the property. This type of deed can be used in situations where someone wants to pass the property on to someone else and avoid probate, while still being allowed the use and control of the property during their lifetime. There are, however, some caveats involved when establishing this kind of arrangement.
A financial advisor could help you put an estate plan together for your family’s needs and goals.
What Is a Ladybird Deed?
A ladybird deed is a life estate deed that allows for the transfer of property during someone’s lifetime without requiring the original owner to give up control of the property. Once the person who created the deed, called a grantor or life tenant, passes away the property is automatically transferred to their remaindermen or remainder beneficiaries. This is just another way of saying the people the grantor designated to inherit the property.
While they’re still living, the grantor has certain rights and powers. Those include the right to:
- Sell the property
- Mortgage the property or take out a reverse mortgage
- Lease the property and receive all rents, royalties, income or profits derived from that activity
- Gift the property to someone else
- Change or cancel the deed
The grantor of a ladybird deed doesn’t need the permission of the remainder beneficiaries to do any of these things. Once the grantor passes away, these same rights carry over to the remainderman or remaindermen.
How Does a Ladybird Deed Work?
Ladybird deeds work by allowing a property owner to divide up ownership of that property into different phases. During their lifetime, the deed allows them to establish a life estate. As long as this life estate is in effect, they have all of the rights mentioned previously. They can live in the property if they want or need to or lease it out.
The second phase of ownership occurs once the grantor passes away. As long as they’ve made no changes to the deed during their lifetime, the transfer of property happens automatically at their death. What sets a ladybird deed apart from other property transfer arrangements is that the property in question is not subject to probate.
Probate is the legal process in which someone’s estate is inventoried and distributed after their death. An executor is responsible for taking possession of the deceased person’s assets, estimating their value, liquidating assets as needed to pay any outstanding debts, then distributing remaining assets among their beneficiaries. This distribution can happen according to the terms of a will if the person had one or state intestacy laws if they died without a will.
Benefits of Ladybird Deeds
There are some good reasons to consider using an enhanced life estate deed. For example, the main advantages include:
- Right to use (and profit from) the property
- Control over the terms of the deed
- Probate avoidance
Aside from that, ladybird deeds can be useful for Medicaid planning. Medicaid can help to cover some or all of long-term care costs for eligible beneficiaries. Qualifying for Medicaid depends on your financial resources. Having too many assets could make you ineligible unless you first spend down some of those assets.
A ladybird deed can offer an advantage if your state doesn’t include the value of your primary residence when counting assets. You can transfer the home to someone else after you pass away without violating Medicaid’s five-year lookback period. At the same time, you can still retain control of the property. As long as your state’s Medicaid rules don’t require you to include your home as an asset, you can set up this type of deed without it affecting your eligibility for benefits.
Once you pass away, a ladybird deed could protect your beneficiaries from Medicaid estate recovery actions. Estate recovery allows Medicaid to collect repayment for the care that was provided to you from your assets. Depending on which type of assets your state’s Medicaid program goes after, a home you added to a ladybird deed could be protected since the property isn’t subject to probate.
There are also some tax benefits to be had with an enhanced life deed. For tax planning purposes, a ladybird deed is considered to be an incomplete gift. This means there’s no gift tax on the transfer and no requirement to file a gift tax return. The property also qualifies for a stepped-up basis once it passes to the remainder beneficiaries, which can help minimize any taxes they might owe if they decide to sell the property later.
Drawbacks of Ladybird Deeds
One of the biggest drawbacks of using a ladybird deed is that they aren’t allowed in the majority of states. Currently, only a handful of states, Florida, Texas and Michigan, Vermont and West Virginia, allow them. So if you don’t live in a state that permits them you won’t be able to use a ladybird deed as an estate planning tool.
Ladybird deeds can also offer less protection and flexibility than other types of estate planning arrangements, such as a Medicaid asset protection trust or a living trust. For example, if you sell the home for any reason then the proceeds from the sale could be considered assets for Medicaid eligibility. Even if you keep the home, you have virtually no control over what happens to it after you pass away.
If your beneficiaries decide to sell the home there’s nothing you could do about it. The property is also unprotected from creditor lawsuits. Leaving the home in a trust, on the other hand, could provide protection from creditors.
How to Establish a Ladybird Deed
The first step in creating a ladybird deed is making sure you’re able to do so under your state’s laws. Again, the states that allow enhanced life estate deeds are Florida, Texas, Michigan, Vermont and West Virginia. About half of the states have transfer on death deeds, which have similar features to ladybird deeds.
For example, there may be certain wording you need to use or certain formatting you need to follow. An estate planning attorney can help you draft a legally valid ladybird deed. You can also talk to an estate planning attorney or financial advisor about whether this type of deed might be right for you. It’s possible that another type of deed or trust arrangement could be more suited to your situation.
A ladybird deed could be useful in certain estate planning situations if you’d like to leave your home to someone else but still have use of it during your lifetime. Whether this type of deed could work for you can depend on where you live and how you’d like to handle your estate during your lifetime.
Estate Planning Tips
- One of the most basic tools in an estate plan is a last will and testament. This document allows you to spell out how you’d like your assets to be distributed after you pass away. If you don’t have a will yet, making one can be easier than you might think. Online will-making software programs allow you to draft a simple will at a reasonable fee. If you have a more complex estate, however, you may want to seek out an estate planning attorney for help with making a will.
- Consider talking to our financial advisor about whether a ladybird deed might be appropriate for your estate plan. If you don’t have a financial advisor yet, finding one doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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