LADY BIRD DEED: Useful in limited situations


President Lyndon B. Johnson conveyed property to his wife, Lady Bird Johnson via deed that is now commonly referred to as a "lady bird deed" and also known as an "Enhanced Life Estate Deed".

A lady bird deed is a special type of life estate deed used to automatically transfer ownership of a property to another person(s) [referred to as the remainder beneficiaries] upon the owner’s death while avoiding probate. It does not interfere with the owner’s control over the property. The owner retains the freedom to sell or mortgage the property without involving the remainder beneficiaries (remainderman). This, “retained control”, means that the remainder beneficiaries have no decision-making authority over the property while the owner is still alive. The owner of the property can also change the remainderman and record a new Ladybird Deed without the consent of the current remainder beneficiaries.

ADVANTAGES:

  • No Gift Tax: it is not considered a gift subject to federal gift tax.

  • Medicaid: It is not considered a divestment subject to penalty for Medicaid eligibility purposes.

  • Freedom: After signing a lady bird deed, an owner may still sell, gift, mortgage or lease the property during his/her lifetime without needing the permission of the remaindermen. (However, some title insurance underwriters might require that the remaindermen quitclaim their interest, which requires their notarized signatures on the deed.)

  • Step-Up in Basis: The property receives a step-up in basis at the owner's death, which is beneficial for income tax purposes if the property has increased in value.

  • Probate Avoidance: The property will not have to be probated upon the owner's death.

  • Documentary Stamp Tax: The Department of Revenue does not consider these types of deeds subject to documentary stamp tax.

  • Relatively Inexpensive: It is less expensive than forming a Trust.

DISADVANTAGES:

  • Homestead: If the owner has spouse and/or a minor child, the property cannot be devised to anyone else with any deed, including a lady bird deed. (If the owner has only a spouse, prenuptial and postnupital agreements may be used to get around this issue.)

  • Multiple beneficiaries: If the owner leaves the property to more than one beneficiary, upon the owner's death the beneficiaries must agree on what to do with the property.

  • Mortgages: Banks may consider the transfer of a home subject to a mortgage using a lady bird deed as a trigger to call the loan.

  • Beneficiary is a Minor: A trust is a better option if the owner wants to leave the property to a minor because a trust allows the owner to designate a trustee to manage the property for the minor until the minor reaches a certain age.

  • Creditor Issues: A creditor’s lien can attach to a remainder interest, creating a cloud on the title for the life tenant. For example, the IRS has indicated that a tax lien filed against a remainder interest does attach. (See The Fund Concept, Volume 39, July 2007, p. 77.) This means that if the life tenant sells the property, the lien against the remainder person must be paid.

  • Title Insurance: Standard title insurance policies cover beneficiaries under a will or trust but typically do not cover persons who receive a gift of real property. It is likely that the remaindermen will not have the benefit of the existing title insurance policy.

An option that may better suit you (and provide more structure and guidance to your beneficiaries) is a Land Trust.

When most people think of Trusts, they imagine 50 pages with tons of legalese and complicated provisions. That is not the case with a Land Trust.

Give us a call. We will explain how Land Trusts work and help you decide whether it is a viable option for you.


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