Using a Lady Bird Deed in Estate Planning

The Lady Bird deed was supposedly named after the wife of late President Lyndon B. Johnson, who used this type of estate planning tool to transfer property and land to his wife without invoking Medicaid claims and liens.

Previously known as an enhanced life estate deed, the Lady Bird deed is a type of estate planning tool generally used as a limited form of asset protection. However, it has many limits. Let's find out if the Lady Bird deed is something you might want to consider invoking in your estate plan.

Understanding Lady Bird Deeds

A Lady Bird deed is an enhanced life estate. First, understanding how life estates work is essential to understanding the Lady Bird deed.

First and foremost, life estates are a popular arrangement wherein a property is transferred into the ownership of an heir when the original owner dies. In the meantime, the original owner retains the right to use the said property until they die.

In other words, a life estate transfers the title of a property into someone else's name but not the usage rights. As the original owner and life tenant, nobody can kick you out. Furthermore, your heir (the remainderman) can sell their title, but the subsequent buyer will still have to wait for you to pass away.

The benefit of a life estate is that any property dispensed to a beneficiary through it bypasses the probate process. One of the main drawbacks of a conventional life estate is that the grantor (i.e., the life tenant) cannot sell or mortgage the property.

Why Avoid Probate?

Probate is a court-supervised process by which an estate is valued and distributed under the watchful eye of the local courts. The process involves:

1. Setting up an inventory of the estate
2. Managing a decedent's final tax and payroll obligations
3. Satisfying debts and creditors
4. Distributing and dissolving the estate.

By naming a direct beneficiary, Lady Bird deeds and life estates cut more significant properties out of the probate process. There is no need for a court to prove a will's legitimacy and oversee the distribution of a property from a decedent's estate into the hands of an heir if the decedent already named their heir in a title and agreed to an automatic transfer upon death. This process can take a long time in many states, upwards of a year.

Lady Bird Deeds vs. Life Estates

Lady Bird deeds are distinguished from other life estates by three essential factors: mortgages, Medicaid, and the federal gift tax.

Mortgages

The first difference is that "life estate is coupled with an unrestricted power to convey during the Grantor's lifetime." What does that mean? In the context of a life estate, a Lady Bird deed allows the holder of the life estate to mortgage the property.

Medicaid

Secondly, as mentioned previously, when discussing Lyndon B. Johnson's use of the deed, a Lady Bird deed allows the grantor to continue receiving Medicaid benefits and excludes the property from Medicaid claims and liens.

Why would Medicaid be relevant when discussing the transfer of property? Many people who set up a Lady Bird deed wish to do so because they want a way of ensuring that an heir receives their property without giving up the right to live in it or risking the loss or liquidation of the property through the probate process. Many people who wish to use a Lady Bird deed might want to qualify for Medicaid to help pay for long-term nursing care.

Using a Lady Bird deed instead of a conventional life estate precludes Medicaid from counting the property as a transfer (which may go against the grantor's ability to qualify otherwise due to the home's value). Because the property skips probate, Medicaid cannot claim its value during the probate process as a creditor if the grantor dies prematurely.

This is because Medicaid checks your finances and transfers to determine eligibility. A traditional life estate would effectively represent the transfer of the entire home's value into a beneficiary's hands – which, if it were facilitated in the last five years, would alert Medicaid. A Lady Bird deed does not.

Gift Tax

Last but not least, a Lady Bird deed dodges the federal gift tax because the transfer does not take place until the life tenant is dead, at which point there is no gift tax to impose because it's a bequeathment/inheritance instead.

Where Can I Create a Lady Bird Deed?

We mentioned that Lady Bird deeds have more than one limit, which is why very few states accept and process a Lady Bird deed. This is not a concept universal across all fifty states – in fact, only five states currently authorize the creation and use of the Lady Bird deed:

• Florida
• Michigan
• Texas
• Vermont
• West Virginia

If you live outside these states, do not worry – there are other alternatives. In California, for example, you can achieve a similar feat through the transfer upon death deed. This deed or clause allows you to name a beneficiary on any qualifying property (as a beneficiary designation). The property will bypass probate and go straight into the ownership of your chosen heir upon confirmation of your death.

Lady Bird Deed Disadvantages

In addition to only being available in five states, a Lady Bird deed has a few other limitations.

First, there is a lack of asset protection. A creditor of the grantor may claim the property while the grantor is alive rather than through probate. They may also place a lien on the property, provided it is not a homestead (there are special provisions for family homesteads).

Secondly, if the recipient or remainderman dies before the life tenant does, the property may return to the life tenant's estate (and go through probate).

Lastly, while Lady Bird deeds are easy to create and change and void (i.e., cancel), forgetting to do so can be costly. If you change your mind about the property and try to pass it onto someone else through a will, you might shock them when they find out that the beneficiary designation through the Lady Bird deed takes precedence. It's crucial to stay on top of what takes priority in a larger estate plan.