An important estate planning tool to know about is a lady bird deed, also known as an enhanced life estate deed. This type of deed allows owners to pass down property without going through probate. Many people use a lady bird deed to maintain property within their family without sacrificing Medicaid eligibility or exposing their assets to state-driven Medicaid recovery efforts after they are passed to a new owner. Moreover, people can revoke or change a lady bird deed at any time after establishing it, which is not possible with a standard life estate deed. The issue with the lady bird deed is that it is only available in five states, namely Texas, West Virginia, Vermont, Florida, and Michigan. However, people who live in a different state do have options to achieve a similar estate planning effect.
A Closer Look at How the Lady Bird Deed Works
The lady bird deed achieves its estate planning goals by dividing the ownership of property into two phases. The first phase takes place while you are alive and the second happens after you die. Because of this divide, the deeds work very differently from standard life estate deeds. With the latter, you need permission to sell or mortgage the property from the beneficiaries that are listed, which provides them with partial control even while you are still alive. This is not the case with the lady bird deed. You will continue to have full control of the property without needing any input from your beneficiaries. After you die, the beneficiaries named in the deed will automatically inherit the property. With a lady bird deed, you can name a person or a trust as a beneficiary and there are no limits imposed on the number. In this way, the lady bird deed achieves the same as a standard life estate deed while ensuring that the actual owner maintains full control while alive. However, this is not the sole benefit.
The Reasons to Consider Setting up a Lady Bird Deed
While many people opt for a lady bird deed to maintain full control of their property during their lifetime, these are other reasons to opt for this specific document over the traditional one. One reason that is often stated has to do with probate. A lady bird deed actually removes a piece of property from the owner’s estate upon their death and passes it directly to the people or trusts listed. Because of this, the property no longer needs to pass through probate after the owner dies. This is beneficial because probate often involves considerable expenses for an estate and, moreover, it can tie up property from transitioning between owners for a long and unpredictable amount of time. In other words, a lady bird deed ensures a smooth transition of property after someone dies and can help to prevent much of the stress that is often associated with the process.
Another benefit of a lady bird deed is the ability to sidestep federal gift taxes. Sometimes, property owners choose to transfer property to inheritors while they are still alive to avoid losing control as they would with a standard life estate deed. However, taking this route can trigger a gift tax. Depending on exactly how the property is transferred and to whom, it may be considered a gift by IRS standards and thus require inheritors to file a gift tax return. In some cases, even the former property owner will need to pay a gift tax in the year that it is transferred. Because a lady bird deed transfers property after the original owner dies, the gift tax rules do not apply.
The Retirement-Focused Benefits of a Lady Bird Deed
Not all of the benefits of a lady bird deed have to do with estate planning. Some of its benefits are specifically related to retirement planning, and these are sometimes the most overlooked benefits. For example, some of the states that offer a lady bird deed actually stipulate that the property’s taxable value cannot be increased more than a certain percentage by property tax assessors. However, the capped percentage can change and typically resets whenever the property changes hands. Since the lady bird deed transfers property upon the owner’s death, it helps to limit property taxes that retirees will need to pay and makes those payments much more predictable, which is key for surviving on a fixed income.
A lady bird deed can also preserve Medicaid benefits. This is because transfers within the five years prior to applying for Medicaid benefits can still be counted as your property and get factored into calculations. Since a lady bird deed does not get counted as a transfer for Medicaid purposes, it does not affect eligibility. With other options, retirees may not qualify for full benefits. Also, federal law states that assets can be seized after the owner’s death to recover some of the costs of long-term care covered by Medicaid. With lady bird deeds, property does not actually count as part of the deceased person’s estate and thus cannot be recovered.
Options that Are Similar to the Lady Bird Deed
The biggest downside of the lady bird deed is that it is only available in five states. A similar option is the transfer-on-death deed, which is available in 29 states and works much like the lady bird deed with the addition of allowing for contingent beneficiaries. Other than that, a revocable living trust is a good option, as it bypasses probate and maintains control for the owner while still alive. However, these trusts are complex documents and can be costly to create. Life estate deeds will help individuals bypass probate, but they require that beneficiaries agree to any changes made even with the owner alive. Remember that wills can transfer property, but they may need to go through probate. Quitclaim deeds are another option for transferring property, but the transfer happens while the owner is still alive, so it does not provide tax benefits.