Florida lady bird deeds pros and cons.
We are going to take a look at the Florida lady bird deed and whether it might be right for your estate plan. We will see what it can do, whether it might be right for your situation, and the pros and cons for using it in estate planning.
“A lady bird deed can be useful to avoid probate if the home is the primary asset.”
A lady bird deed is another name for an enhanced life estate deed. It is called a lady bird deed because it was made famous by President Lyndon B. Johnson and his wife, Claudia A. "Lady Bird" Johnson, who used this type of strategy to pass their home to their children. A lady bird deed allows the grantor to reserve ownership rights in the property, including the right to sell or encumber the property, during their lifetime. Then, at their death, the property will automatically pass to the individuals listed as remaindermen without going through probate. It is a have your cake and eat it to scenario. Florida is one of the few states to recognize this type of deed. First, lets talk about the pros:
Pros of the lady bird deed.
(1) No probate. As mentioned above, probably the biggest pro of a lady bird deed is that the process will not have to go through the probate process. Probate can be long and expensive and is best avoided when possible.
(2) Cost. A lady bird deed is almost always cheaper than creating a trust and placing the property in it. It is certainly more cost effective than having the property go through the probate process. It may be more efficient as well, depending on the situation. You might know that documentary stamp taxes generally have to be paid with most deeds of real property; however, the documentary stamp taxes on a lady bird deed are generally not due until the owner dies and the propert is transferred to the remaindermen.
(3) Homestead rights preserved. The lady bird deed does create a future interest in the remaindermen beneficiaries, but that only takes effect with the grantor passes away. While the owner is still alive, they can do many things with the property, including selling it or getting a mortgage without getting permission from the remaindermen beneficiaries. Also, the Florida homestead rights are still protected.
(4) Capital gains taxes. The property transferred through a lady bird deed will be taxed on the value of the property at the owner's death rather than using the owner's original tax basis. For example, if the owner bought the property for $100k and sold it later for
$300k there could be a taxable capital gain of $200k. However, if the property is transferred at the owner's death through a lady bird deed and the remaindermen then sell it immediately for $300k, then there will be no taxable capital gain, assuming it was worth $300k at the time of the original owner's death.
(5) Medicaid eligibility. Long term care can be very expensive. The cost of nursing home care is often starts at $4,500 per month. When a person's assets have been substantially used up, Medicaid will step in any pay for long term care. However, there are strict rules and Medicaid can often recover costs from the estate later. Property transferred in a lady bird deed in the state of Florida is not subject to Medicaid recovery rules. This sets Florida apart from many other states that do allow Medicaid to recover payments by going after such property. Also, property in a lady bird deed will not affect Medicaid eligibility.
Cons of the lady bird deed.
(1) Current owner has debts. If the current owner has debts, her creditors may be able to attach a lien to the remaindermen's' interest. If they try to sell the property later, the creditors of the original owner may be able to collect on the lien. It can take up to two years after the owner's death for this issue to be resolved if it is uncertain because that is how long the creditors have to file a claim and attempt to file a lien.
(2) Change of heart can be expensive. While the current owner can change their mind regarding who the beneficiaries are or re-transferring the property, a new deed will have to be created and filed each time in accordance with Florida law. It is more involved than just changing the terms of a will or trust.
(3) Spouse or minor children involved. A lady bird deed should not be used if the current owner is married or has a minor children and this is the primary residence. The Florida homestead law is set forth in the Florida Constitution. Things can get complicated but the thing to know is that if a person dies with a surviving spouse and no children, the surviving spouse must at the very least get a life estate in the property, regardless if whether the surviving spouse has any legal title on the property. If there are minor children of the current owner, the homestead property cannot go to anyone other than the current owner's descendants. There are a lot of different scenarios, but a lady bird deed is not an effective planning tool in these circumstances.
(4) Title Insurance. Title insurance policies will usually cover beneficiaries who receive property through a will or trust. However, they do not usually cover remaindermen gifted real property.
(5) Remainderman with tax problems. Although the remaindermen do not have a vested interest in the property where they are a beneficiary of a lady bird deed, an important exception is an IRS tax lien. An IRS tax lien of a remainderman may attach to the property even before the current owner dies. This may limit the current owner's ability to sell the property or get a mortgage. Don't go giving remainder interests in property to people with tax problems!
There are a lot of things to consider. If you have a simple estate without a surviving spouse or minor children, a lady bird could be a cost effective way to transfer your real estate and avoid property. If there are complications, like debt or you change your mind a lot, a lady bird deed might not be great. It is helpful to talk to an experienced attorney, which can save you a lot of money and heartache in the long run.