An enhanced life estate deed is sometimes called a “Lady Bird deed.” The Florida lawyer who created this type of deed in the 1980s arbitrarily named it after President Lyndon B. Johnson’s wife. There’s no evidence that the President ever transferred property to Lady Bird Johnson in this way. This type of deed is recognized in five states as of 2022: Florida, Michigan, Texas, Vermont, and West Virginia.
How Does an Enhanced Life Estate Deed Work?
The initial owner of the real estate, referred to as the “life tenant,” retains control over the property during their lifetime. The life tenant retains the right to mortgage or sell the real estate without the consent of their beneficiaries or the remaindermen named in the deed. They haven’t actually given the home to them yet. The real estate doesn’t actually transfer until the life tenant’s death.
Life Estate vs. Enhanced Life Estate Deed
A standard life estate deed also transfers ownership of a property prior to death, but the owner can’t mortgage or sell the home without the permission and “joinder” of their remaindermen. This type of deed effectively gives the remaindermen the property in the present time. The owner merely retains a “life estate,” the right to remain living there until death. “Joinder” means that these individuals are parties to any mortgage or sale. The deed must nonetheless be prepared, signed, and recorded in the county land records office just like any other deed. A property that’s transferred by either of these deeds would require probate if the remainder beneficiaries should die before the life tenant.
Life Estate vs. Transfer-on-Death Deeds
You might want to consult with an attorney to consider another estate-planning mechanism if you don’t live in one of the five states that recognize Lady Bird deeds. Transfer-on-death deeds function in a manner similar to enhanced life estate deeds. They don’t take effect and transfer property to beneficiaries until after death, but the language in the deed must specifically state this. The property doesn’t require probate. It doesn’t become part of the decedent’s probate estate because a mechanism—the deed—is already in place to transfer ownership from the deceased owner to one or more living beneficiaries. More than half of all states recognized transfer-on-death deeds in their statutes as of 2020:
AlaskaArizonaArkansasCaliforniaColoradoDistrict of ColumbiaHawaiiIllinoisIndianaKansasMaineMinnesotaMississippiMissouriMontanaNebraskaNevadaNew MexicoNorth DakotaOhioOklahomaOregonSouth DakotaTexasUtahVirginiaWashingtonWest VirginiaWisconsinWyoming
The Effect on Medicaid
The government imposes a five-year “lookback” period on Medicaid eligibility if a time should come when you require long-term care and you apply for these benefits. This means that you can’t transfer ownership of assets within five years of making the application. Some people have done this in an effort to “spend down” their assets in order to become eligible for Medicaid assistance, which is needs-based. The extent of your Medicaid eligibility depends on the value of assets you own at the time you apply. Less is more. Many people believe that they can simply give property away before applying, but that isn’t the case. Assets given away during this five-year time period can be “pulled back” into the value of your estate for qualifying purposes. An enhanced life estate deed technically doesn’t count as a transfer. You retain control over the property. That control doesn’t transfer until your death. This isn’t generally the case with transfer-on-death deeds, but it depends on state law. Your home might still be considered available to pay back your Medicaid benefits after death, however. Federal law mandates that all states have an “estate recovery program” in place to recoup benefits, but some states will only take from probate estates. Your property would be spared in this case if you were to transfer it by Lady Bird deed. Otherwise, your remainder beneficiaries might be forced to sell the home.
Do I Need to Pay Estate Tax?
A home transferred via a Lady Bird deed contributes to the value of the homeowner’s estate for estate tax purposes. The property is considered to be an inheritance granted to your remainder beneficiaries. Only estates with values in excess of $12.06 million are subject to the federal estate tax as of the 2022 tax year. Several states also have estate taxes, however. Some of their exemption thresholds are much lower. Your beneficiaries will receive a “stepped up” basis for purposes of any capital gains tax that might come due if they sell the real estate after your death. Their basis in the property is its value at the time of your death, not its value at the time you originally acquired it, as would be the case if it were transferred to them during your lifetime. This can make a considerable tax difference.
