LADY BIRD DEED: Useful in limited situations
- May 5, 2020
- 4 min read
Updated: Jul 7
This article was written by Elan R. Kaney, Esq., a Florida attorney with more than 25 years of experience concentrating in probate, estate planning, business law and tax law.
President Lyndon B. Johnson conveyed property to his wife, Lady Bird Johnson via a 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: At the time the deed is created and recorded, it is not considered a gift subject to federal gift tax.
No Medicaid Penalty: It is not considered a divestment subject to penalty for Medicaid eligibility purposes.
Owner Retains 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 Upon Death: 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.
No 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 Restrictions Apply: Florida's constitutional homestead restrictions continue to apply. A Lady Bird Deed cannot be used to circumvent the inheritance rights of a surviving spouse or minor child.
Multiple Beneficiaries Present Challenges: 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.
Acceleration Clauses in Mortgages Can Be Triggered: Although federal law generally protects many estate-planning transfers from triggering a due-on-sale clause, individual loan documents should be reviewed. Some lenders or title companies may require additional documentation before a future sale or refinance.
Issues if the 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 Lien on Remainer Interest: 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. Because the remainder beneficiaries receive a present future interest in the property, their creditors may be able to attach liens to that remainder interest. Although the life tenant retains control during life, those liens can create title issues if the property is later sold.
Title Insurance Policy May Not Benefit Remaindermen: Existing owner's title insurance policies generally protect only the insured owner and do not automatically extend coverage to beneficiaries who later acquire title. New owners should consult a title company regarding available coverage.
Is a Lady Bird Deed Always the Best Choice?
While Lady Bird Deeds are an excellent probate-avoidance tool for many Florida homeowners, they are not the right solution for every situation.
For example, a Lady Bird Deed works well when the goal is simply to transfer a home to one or more beneficiaries upon death while allowing the owner to retain complete control during life. However, it offers very little guidance regarding what happens after the owner's death.
If multiple beneficiaries inherit the property, disagreements can arise over whether to sell the property, keep it as a rental, occupy it, or buy out the other beneficiaries. The deed itself provides no mechanism for resolving these disputes.
Likewise, if a beneficiary is a minor, has special needs, struggles with financial responsibility, is involved in a divorce, or has creditor problems, a Lady Bird Deed may create unintended complications.
A Land Trust May Be a Better Alternative
Many people assume that every trust is a lengthy, complicated document filled with legal jargon. In reality, a Florida Land Trust is often surprisingly simple.
Unlike a Lady Bird Deed, a Land Trust can provide ongoing management of the property after the owner's death while still avoiding probate. It allows the owner to:
designate who will manage the property;
establish rules for selling, maintaining, or renting the property;
avoid disputes among multiple beneficiaries;
provide continuity if a beneficiary is a minor or unable to manage real estate;
maintain a greater degree of privacy regarding ownership.
For families who own valuable real estate, vacation homes, rental property, or property intended to remain in the family for future generations, a Land Trust may offer flexibility and protection that a Lady Bird Deed simply cannot provide.
The best choice depends on your family, your goals, and the nature of the property. An experienced Florida estate planning attorney can help determine whether a Lady Bird Deed, a Land Trust, or another planning strategy is the better fit.
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