A lady bird deed, also referred to as an enhanced life estate deed, is a deed used in Florida that enables real estate to transfer at the death of an owner to a beneficiary named in the deed. As an example, if mother wants her only son to inherit her home, mother could sign a lady bird deed that says she owns the home for life, and when she passes away, her son automatically inherits the home.
Pros:
Avoid probate – This is the primary reason most people use a lady bird deed. A lady bird deed can be much cheaper than other ways to avoid probate, such as a trust. A lady bird deed might cost about $550 whereas a trust may cost thousands.
Medicaid – Maintains the owner’s Medicaid eligibility because lady bird deeds are disregarded for purposes of determining Medicaid eligibility and excluded from the owner’s estate when the state calculates what can be recovered from the owner’s estate at the owner’s death.
Homestead – Does not affect the homestead character of a residence, so the owner can maintain their homestead tax and creditor protection benefits.
Step-up in basis – The tax basis for the beneficiary is the value of the property on the owner’s death. This allows the beneficiary to sell the property at the time of the owner’s death without incurring federal income tax liability because there is a step-up in basis. In other words, the beneficiary will not be liable for the taxes on the capital gain from the time the owner purchased the property to the time of the owner’s death.
No gift tax – Adding a beneficiary to a lady bird deed will not cause the owner to incur a federal gift tax.
Retain control – The owner retains control over the property during the owner’s life. Thus, the owner may sell, use, and mortgage the property during the owner’s life without the consent of the remainder beneficiary.
Cons:
Public record – The lady bird deed will be recorded in the public record. Thus, the identity of your beneficiaries will be public. If privacy is a concern, a lady bird deed will not be a good option.
Homestead restrictions – If you have minor children or a spouse, a lady bird deed may run afoul of Homestead restrictions. If you are survived by minor children or a spouse, you cannot transfer your homestead to anyone else. Therefore, if a married couple wants to use a lady bird deed to transfer property to remainder beneficiaries, both spouses need to sign the deed to show their intent to pass the property to the remainder beneficiaries upon both spouses’ death. Generally, a lady bird deed should not be used to avoid probate when the property is homestead and the owner has minor children.
Elective share – Lady bird deeds will not avoid concerns about elective share rights of a spouse.
Multiple beneficiaries – Having multiple beneficiaries on your lady bird deed could be a problem if a beneficiary dies before you. If one of the beneficiaries dies before you and the lady bird deed is not updated, the property may need to be probated. In addition, your beneficiaries will need to agree with what to do with the property when you pass away. If you expect your beneficiaries to fight over what to do with the property, then a trust might be a better option.
Lack of asset protection – Property in a lady bird deed may be subject to creditor claims of the owner. In addition, certain creditors of a beneficiary might be able to place a lien on the interest of the property. For example, an IRS tax lien filed against a beneficiary can attach to the property.
Noncitizens – The laws of other countries may impose a tax when there is a change in ownership, similar to our capital gains tax. Noncitizens should consult with a tax advisor in their home country before considering a Lady bird deed.
Title insurance – If there is title insurance on the property, the title insurance may not transfer to the remainder beneficiaries. Whereas standard title insurance covers beneficiaries of a will or trust.