Clients often ask us about creating a lady bird deed for them. They have heard that this type of deed can be useful for both Medicaid planning and probate avoidance. While it is true that a lady bird deed confers certain benefits in these areas, it also brings with it significant drawbacks. That is why our attorneys recommend them to clients only under certain limited circumstances. Read on to find out more.
The Advantages Of A Lady Bird Deed
Florida is among only a handful of states that permits the use of lady bird deeds. Basically, a lady bird deed is an enhanced life estate deed that deeds your property to your named beneficiaries when you pass away. At that time the beneficiaries will automatically inherit the property.
The lady bird deed allows you to retain full control over the property while you are alive. You can sell, mortgage, or give it away without the consent of the beneficiaries. You can even revoke the deed, eliminating the beneficiaries’ future interest in the property. In contrast, a regular life estate deed allows you to deed the property to the person(s) of your choice, but you cease to own the property while you are alive, retaining only the right to its use, occupancy and possession during your lifetime.
Potential benefits of the lady bird deed include:
- Eliminates probate on the property when you, the life tenant, pass away.
- Because a lady bird deed does not actually transfer the property to anyone during your lifetime, it is not considered an “uncompensated transfer” by Medicaid. Therefore it will not count against your eligibility for Medicaid benefits.
- The property you have deeded through the lady bird deed is not part of your probatable estate upon your passing. Thus, it is is not recoverable by Medicaid once you are gone.
- Because your beneficiaries do not actually get the property until you pass away, the property is not considered a gift, and therefore is not subject to federal gift tax.
- Once you have passed on and your beneficiaries receive the property, they will get a “step-up” in basis if and when they sell the property. This tax benefit is not available to them if you transfer the property to them during your lifetime.
- Your homestead exemption will not be affected by the lady bird deed, provided the deed includes the proper language retaining the homestead exemption.
- Any mortgage on the property is unaffected because there is no change of current ownership.
Sounds good, right? But there is a catch. In fact, there are several.
Potential Disadvantages of A Lady Bird Deed
Here are some of the complications and drawbacks you may encounter with a lady bird deed:
- Your title insurance may not cover your beneficiaries.
- If you want to sell the property or refinance it, a lady bird deed can be problematic. Some lenders will not provide financing if there is a lady bird deed. Many title companies and lenders require all the beneficiaries to sign off on the sale or refinancing, even if the lady bird deed says this is not required. This can be an obstacle if your beneficiaries refuse to sign off, or have predeceased you, or if you have become estranged from them. Some lenders may go so far as to require your beneficiaries’ creditors to release any claims they might have on the property. Do not assume that this will never be a problem in your family: that is what all the people who have encountered these situations believed when they signed their lady bird deeds!
- If one of your beneficiaries predeceases you, the beneficiary’s interest in the property may need to go through probate.
- The insurance company that provides your homeowner’s insurance may claim that you, not the beneficiaries, are covered, and will not extend coverage once the beneficiaries inherit the property.
- If you have more than one beneficiary and they do not get along, they may have difficulty agreeing on what to do with the property once they inherit it. This can lead to family conflict, and even lawsuits.
- Florida law dictates that a spouse may claim an elective share of a deceased spouse’s estate, as well as homestead rights. Minors, too, have certain rights of inheritance or homestead under Florida law. These laws take precedence over a lady bird deed. In other words, you may not use a lady bird deed to disinherit them. A lady bird deed in conflict with these laws is void.
So When Do We Recommend A Lady Bird Deed?
As noted above, we will recommend a lady bird deed for your estate plan if you are a client for whom we have prepared or are preparing a revocable living trust with you as trustee. In this situation, a lady bird deed designating the trust as the beneficiary allows you to amend the trust and/or amend the beneficiary of the trust, and sign any paperwork required by a lender or a title company, without the consent of any other individual. Other advantages are that it allows you to avoid probate; will not jeopardize your Medicaid eligibility because it is not considered a transfer for Medicaid purposes; and will not affect any outstanding mortgage.
When you consult with us about your estate plan, our attorneys will let you know if a lady bird deed is a good strategy for your specific circumstances. Phone (561) 625-1100 for an appointment.