Estate planning can feel overwhelming at times, but the more you know, the easier it will be. Learning about your options, and the strategic ways you can set yourself and your family up for long-term financial success, is smart. A Lady Bird deed on your property might just be what you’ve been looking for. The more prepared you are, the better-equipped you’ll be to put a plan in place that offers the most protection possible.
Learn everything you need to know about Lady Bird deeds, including the answer to the question: what is a lady bird deed, how they work, benefits and drawbacks, which states allow them, tax implications and more, here.
What is a Lady Bird Deed?
A Lady Bird deed is a type of estate deed that allows you to transfer property to another person while retaining control of it.
It’s often used when planning to apply for Medicaid. The idea is that you can transfer ownership of your home to a beneficiary while you’re still alive. Lady Bird deeds specifically enable you to transfer ownership while retaining rights as the person who lives in the home. This tactic can ultimately lower your total assets while protecting your right to stay in your home.
What is the Purpose of a Lady Bird Deed?
A Lady Bird deed fulfills two purposes. The first is to simplify the process of transferring assets to beneficiaries after a Grantor’s passing. It allows property to skip the probate process - the complicated, expensive, lengthy and generally taxing process that happens after an estate owner passes - and other complicated procedures. This works because ownership was already established and the transfer is automatic.
The second reason a Lady Bird deed might make sense is for those who are trying to reduce asset values in an attempt to qualify for Medicaid. Typically, you cannot transfer property within five years of applying for Medicaid assistance. In some states, however, a Lady Bird deed counts as an exception to this rule.
How Does a Lady Bird Deed Work?
The Lady Bird deed establishes a beneficiary. This is the person who receives the property. The deed also specifies the rights of the current owner (or Grantor). These rights usually include the freedom to mortgage the home, sell it or otherwise leverage it.
When the Grantor passes, the deed formally transfers complete ownership to the beneficiary. No probate is necessary. Also, property taxes are usually re-evaluated at this point. For more resources, check out:
Who Needs a Lady Bird Deed?
A Lady Bird deed is ideal for someone who wants to plan their estate in a way that improves their ability to qualify for Medicaid. Sometimes, a home is valuable enough to disqualify you for Medicaid coverage. Someone using a Lady Bird deed should not have a spouse or a minor child. Spouses and minor children have rights that can supersede the stipulations of a Lady Bird deed.
What Are the Advantages of a Lady Bird Deed?
There are a few clear advantages of a Lady Bird deed, including:
Skip probate: You can skip probate when inheritance transfers take place.
Qualify for Medicaid: It can help you qualify for Medicaid by reducing your assets.
Protect your rights as the person living in the home: It protects your rights in your home even after you technically give it away.
Can be tax advantageous for beneficiaries: It avoids gift taxes.
What Are the Disadvantages of a Lady Bird Deed?
Though they may sound great so far, Lady Bird deeds aren’t always the best option. Learn about the following disadvantages of this special type of deed:
Doesn’t work for everyone: A spouse or minor child can dispute a Lady Bird deed.
Potential title insurance issues: It severely complicates title insurance if you try to mortgage the property.
Limited beneficiaries: You cannot have multiple benefactors with a Lady Bird deed.
Greater debt potential for beneficiary: Skipping probate means that debts attached to the house remain after inheritance.
Possible increase in property taxes: Property taxes sometimes increase upon transfer.
What Are Tax Implications of Lady Bird Deeds?
The tax implications of Lady Bird deed estate planning show up in two primary ways. The first is that this type of transfer skips gift taxes. Because the property isn’t formally transferred while the original owner is alive, it’s not counted as a gift.
The second implication is that the property will be reassessed for taxes. Normally, properties aren’t assessed for taxes unless they’re transferred. A Lady Bird deed triggers a transfer that comes with a new tax assessment and can potentially increase property taxes considerably.
What is the Difference Between a Ladybird Deed and a Transfer on Death Deed?
A transfer on death deed can be a simpler approach to estate planning. With this type of deed, when the owner passes, the property goes straight to the inheritor, again without the need for a messy and complicated probate process. Until then, the inheritor has no rights at all regarding the property and it is fully owned by the Grantor until his or her passing.
What States Recognize Lady Bird Deeds?
Lady Bird deeds are not recognized in most states. Instead, they’re only formalized in the following places:
Florida
Michigan
Texas
Vermont
West Virginia
Is Lady Bird Deed a Good Idea?
Though they can be great in certain, very specific instances, a Lady Bird deed doesn’t provide a general solution to all estate planning. That said, if you live in a state where this type of deed is recognized, and it can help you qualify for Medicaid while improving your overall strategy toward your Estate Plan, then it might be an excellent route for you to consider.
In other cases, different estate planning tactics might be a better option. This is especially true if you have a spouse or minor children. Similarly, if Medicaid is not a primary concern, then a Lady Bird deed is not usually necessary.
A Lady Bird deed can be a smart way for you to plan how you’ll transfer property to your beneficiaries, while protecting your estate and your qualification for Medicare. Now that you’ve learned about Lady Bird deeds in detail, you can make an informed decision about whether or not one might make sense for you and your needs.
Trust & Will can help you put together a smart, protective, comprehensive Estate Plan that ensures you, your legacy and your beneficiaries are set up for the future. Learn more about Lady Bird deeds and your options with Trust & Will today. Take our free quiz to see where you should get started, or compare our different estate planning options. Get started today!
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