Copyright © 2019, The Law Office of Alain Roman, PLLC
A life enhanced estate deed, more commonly called a “Lady Bird Deed,” is one of the best kept secrets for estate planning purposes.
The lady bird deed in Florida allows you to avoid probate court, reserve powers to yourself, maintain Medicaid eligibility, and qualify for the Florida Homestead exemption.
I will go over some of the features, benefits, and disadvantages of lady bird deeds to give you a better understanding of why and when they should be used.
With the Florida lady bird deed, you give yourself a life estate interest in your property. A life estate is a right to live in the property until your death.
When you pass away, the real property passes to your beneficiaries designated in the lady bird deed, called the remaindermen.
The lady bird deed works similarly to a pay-on-death provision on a bank account. With a pay-on-death account you can spend the funds in the account during your lifetime and change the beneficiaries at any time, and the beneficiary is only entitled to what is left on the account when you die.
What makes Florida lady bird deeds so valuable is that you are able to retain certain interests in the real property even being the life tenant. I will go over those rights in the next section.
You as the life tenant reserve yourself the right to sell, encumber, and otherwise consume the real property during your lifetime without and knowledge or consent of the beneficiaries.
You may also change the beneficiaries/remaindermen at any point in time or even revert the whole interest back to yourself.
An example of the retained rights in a Florida lady bird deed is as follows:
The Grantor reserves to herself, as Life Tenant, an enhanced life estate in the Property, being the exclusive possession, use and enjoyment of the Property and its rents and profits, without liability for waste, and specifically reserves to herself the following rights, exercisable without the joinder of the remainder beneficiary and with or without consideration: to sell, lease, encumber, or pledge the Property; to manage or dispose of all or part of the Property or to grant any interest in the Property, all by gift, sale, or otherwise; to retain any and all proceeds generated by a sale, lease, or encumbrance, as the Life Tenant in her sole discretion decides; to terminate the interest of the Grantee by the exercise of any right retained in this deed, including the right to cancel this deed by further conveyance to herself or to anyone else.
Compared to an ordinary life estate deed, the lady bird deeds allows you to retain all the rights of fee simple ownership in a real estate property as outlined above.
The second major difference between a lady bird deed and an ordinary life estate deed is that your beneficiaries have no vested interest during your lifetime. In an ordinary life estate deed, the beneficiaries/remaindermen have a vested interest and they are expected beneficiaries of the real property.
With an ordinary life estate, the beneficiaries interest cannot be given away or sold without their consent. However, with a lady bird deed you can free change the beneficiaries/remaindermen at any point in time.
The third major difference is that with a Florida lady bird deed, you do not have a duty to preserve and maintain the real property for the benefit of the beneficiaries. You may free consume the real property, sell the property without the beneficiaries knowledge or consent, and will not have any liability to the beneficiaries.
There are four (4) major benefits of a lady bird deed in Florida: 1) probate avoidance; 2) preserve homestead benefits; 3) preserve Medicaid eligibility; and 4) step-up in basis at your death.
I will go over each benefit in more extent below.
The first major benefit of a lady bird deed is that it allows you to avoid Florida probate court for the real property being deeded.
In Florida, only assets that are titled individually under your name and without a beneficiary designation or a survivorship provision pass through probate court. In the case of lady bird deed, when you pass away you interest extinguishes and the beneficiaries you listed under the deed will inherit the property outside of probate code.
The only thing that your beneficiaries/remaindermen will need to do is to take your death certificate to the appropriate county clerk where the real property is located to show proof of death.
The second major benefit of the lady bird deed is that it allows you to preserve your Florida homestead benefits.
This means that you will not lose your homestead exemption in your real property for tax purposes and your property taxes will not increase due to the change of ownership in the deed.
In addition, you will also be able to maintain your homestead protection against forced sale. Meaning that a creditor will not be able to force sale your property, the creditor will only be able to place a lien on your property. The protection against forced sale will also inure (survive) to your beneficiaries, so long as they are heirs of yours listed under the Florida Intestacy Statute (i.e., surviving spouse, children, other family members).
In Florida, Medicaid considers your assets for the purpose of Medicaid eligibility. However, your Homestead is typically not counted as an asset for Medicaid eligibility purpose to a certain extent.
If you create a Florida lady bird deed, to the extent it is your homestead, it should not affect your Medicaid eligibility. The reason for this is as I explained above, because you reserve most of the rights which are an indicia of ownership, the transfer is not treated as a completed gift.
In this area is important to consult with an estate planning attorney that has knowledge of the Medicaid rules. I will strongly advise you against doing lady bird deeds on your own.
For tax purposes, the lady bird deed is not seeing as a completed gift. It is not a completed gift because you have the right to revert the ownership back to you and you reserve a lot of the rights in the real property.
Section 1014 of the IRS Code, allows a step-up in basis at your death. The benefit of a step-up in basis is that your beneficiaries can turn around and sell the real property without incurring any federal income tax liability.
Let me give you an example. If you buy a property today for $100,000, that will be your basis (cost) for tax purposes. If the real property increases in value to $200,000, then you have a gain of $100,000 if you sell the real property, subject to some exceptions under IRC 121. However, if you pass away when the real property is worth $200,000, in the hands of your beneficiaries the basis of the property will step-up to fair market value, thus not paying any income tax on the sale.
Obviously, like everything in life, there are some drawbacks and/or disadvantages. However, the lady bird deed benefits far outweigh any potential drawbacks.
The first limitation to watch out for when creating a Florida lady bird deed is making sure that your children are not minors. If you add your minor children as beneficiaries/remaindermen, and you pass away before they turn 18 years old, then a guardianship of the property will need to be open for your children to administer their interest until they turn 18 years old.
Second, if your beneficiaries are recipients of Medicaid or other governmental benefits, then the inheritance may affect their rights. Consult with an experience estate planning attorney if this is the case or if there is a potential that this will be the case.
The third limitation is if there are multiple beneficiaries and they do not get along. It might be difficult for them to agree on anything and litigation might be initiated.
The fourth limitation is if one of the beneficiaries passes away before you do. In this case you will need to update the lady bird deed or you may be able to add a survivorship provision if there are more than two beneficiaries.
The fifth and major limitation to watch out for is the limitation of Homestead. You may not use the lady bird deed to circumvent the devise rules of the Florida homestead law. Meaning that if you are survived by a spouse and/or minor children, those restrictions will still apply.
If you are interested in creating a lady bird deed you can contact my office at (305) 489-1415 or complete the form in this page.
I look forward to helping you in the future. Make sure to share this article with your family and friends if you fount it valuable.